10 June 2018

As we pointed out last week, the coming North Korean peace talks, planned here where we are in Singapore, seem more of a distraction to ongoing concerns about a potential trade war which is far more consequential for capital markets. This weekend's G7 summit seem to confirm some of our fears as the US has warned that all multilateral deals involving them can be deemed void as the current US administration prefers a bilateral approach towards trade, allowing each party's specific interests to be better addressed in negotiations. 

Needless to add, the rift between the US and its G7 partners is growing ever wider and beyond just trade and over number of other vital issues including Iran, Russia, the climate agreement and the future of NATO. With many now predicting that Donald Trump looks most likely to stay in the office for the 2nd term, those member states who were hoping that this storm will pass by 2021 US elections are finding themselves in a potential trade war with a huge trading partner, and one which could last for another 7 years. 

Although the US stock market participants continues to look for any ray of sunshine to keep the rally going, the fast crumbling post-WW2 global power structure and consequences of rising trade barriers provide huge uncertainties for multinationals to be remotely as positive as some tunnel visioned bulls seem to be. Although the US dollar has remained strong due to the EM credit sell-off and Euro facing its own big issues, the impact of de-dollarisation of global trade accelerating due this disruptive political climate, could have dire economic consequences as US could find itself paying much higher coupons for its Treasury bonds to lure foreign investors just as its budget deficit is going over $2trn.

Besides the Korean peace talks in Singapore, we have a number of other more relevant market events to look forward to this week, including ECB's likely tapering program to finally put an end to its QE program and the Fed's highly likely rate hike as the US central bank has been consistently guiding for. We think these moves will only further raise pressure on BOJ to abandon its 2% inflation target and immediately reduce its oversized QE program which is proving increasingly disruptive to Japan's capital markets.

Not only its ¥80trn annual buying spree of bonds have rendered Japan's JGB market very illiquid, especially at the vital long-end, but its big ETF purchases have left the bank indirectly owning big stakes in names like Family Mart (8028), Fast Retailing (9983), Terumo 4543, Konami 9766, to name a few, also hurting their liquidity, eschewing performance trends, and is likely to eventually raise fears of the inevitable BOJ selling facing these names--given that ETFs don't mature. We think path to taper for the BOJ chief, Kuroda-san will prove far more challenging given the sheer size of the current intervention. The longer he delays it, we think the harder it will become to keep longer term rates from not spiking. 

Another noteworthy event taking place next week is the E3 video game show in the US, as Nintendo shareholders nervously await its game line-up and its plans for its Switch/Pokémon Go connectivity in hope to keep its console sales on the past year's trajectory and to further fuel what looks already to be very high expectations for its game console's profitability. Also, early talks of Sony looking to launch its own hybrid game platform in the next few years, one that can also double as a handheld but will have 5G connectivity to provide the low latency needed for online gaming, are all worth watching for. 

Staying with some of our other Japan focus names, we have pulled in our bearish claws on Softbank (9984) as we see increasingly positive credit events including offloading more of its unlisted stakes on to the Vision Fund through "Bridge Investments" and at valuations which we suspect are likely to be largely determined by Softbank itself. This leaves big room for future valuation gains for names like Uber as Softbank plans offloads more of its investments onto the Vision fund which looks to be planning to open another $100bn fund, giving Son more currency to pick up more tech trophies which we think could eventually include Tesla.  

Come what may, we see clear signs of Softbank's deleveraging strategy with the firm locking into current low rates in quickly refinancing billions of yen in bonds. Also, the coming US court ruling this week and its likely decision to allow for the proposed merger of AT&T and Time Warner could raise hopes for Sprint/T Mobile deal. However, Sprint's at least partly Chinese-equipped network infrastructure, combined with Son-san's oddly timed decision to sell the majority stake in ARM China to the Chinese, could all be major focus points by US regulators that might well derail the merger.  

Regarding the semiconductor and capital equipment segment we remain negative on most of Japan's top names where we see good short selling opportunities. With crypto currency mining activity showing signs of now plunging in line with crypto values, we see demand for top-end computing being impacted here. Moreover, we are hearing about increasing push-outs in memory spending as new capacity hikes threaten to weaken pricing further.

Meanwhile some analyst are sighting more patching growth appearing on cloud spending. These combined with a very mature smartphone market leave very cautious, especially given the high expectations built in valuations of most semis. For more of our daily thoughts and ideas, Asymmetric long/short picks, and our small and mid-cap growth selections, please contact us.