We retain our bullish stance on semiconductors and robotics stocks

US stocks staged a strong rebound, led by technology segments as we had been anticipating. S&P finished last week posting another 2019 high, rising 20% from its December lows. Meanwhile, Japanese stocks which have continued to follow US trends but trade far more cautiously, managed to post some gains, pushing Topix back above its key 1600 level which is now looking to advance towards its 200-day moving average currently around 1670. 

 As we mentioned in our last publication, when the bears were out in full force from the previous week’s market sell-off, we remain generally positive on stocks as we continue to believe more dovish central banks’ monetary policies, together with the pending trade agreement between the US and China are likely to remain highly supportive despite the weaker corporate earnings picture. We retain this bullish stance, remaining particularly positive on semiconductors and factory automation names whose strong secular growth trends have been severely disrupted by trade uncertainties which will be lifted after the agreement is finally reached. 

Staying on the subject of the trade deal, we thought the change in Trump’s stance to agree with the terms before he meets China’s premier was hugely significant as Xi could not afford to be ambushed in Mar-a-Lago given that pressure by the Party not to look weak or give too many concessions. This is especially given that US president has all but shown his hand in desperately wanting to strike a trade agreement, knowing full well now that walking off would lead to a potential stock market crash. By agreeing on terms before the two meet, it allows Xi more room to strike a friendlier stance and perhaps even making one final gesture of good will in person that Trump can claim as his.

A positive reaction to Nvidia’s $7bn acquisition of Mellanox, provided a useful reminder of the importance of data centres and their growth prospects as exponential data generation growth will not be slowing and investments in hyper-scale centres should resume fairly fast once we these geopolitical uncertainties come to pass with a trade deal. With IoT, 5G and AI, all coalescing to generate even more data, capital investments in this space are bound to resume. Also, Broadcom’s more upbeat guidance which led to more buying in tech sector provided yet another glimpse of how sensitive the market is to good news in the face massive wave of earnings downgrades by analysts in this space.

Focusing briefly on our own market, we are very encouraged by the three-year plans by Tokyo Stock Exchange (TSE) to dramatically revamp Topix, the first section index and pull this measure out of the dark ages. TSE plans to purge smaller firms of below Y25bn market capitalisation from first section listing, looking to remove as much as 30% of the 2100 listings from Topix and finally making the index a far more relevant benchmark. Separately, we are also encouraged to see the latest data which suggest that BOJ has been gradually tapering its oversized Nikkei 225 ETF purchases which has led big anomalies in the market, hurting liquidity of many N225 stocks which have exposed the index and individual stocks to manipulation.