16 September 2018

With last-minute trade talks between China and US announced late last week, global stock markets staged a very unconvincing bounce which seem to have fizzled out by the end of Froday's US market as the US president dispelled critics for accusing him of being forced to negotiate, stating that tariffs on China will go ahead if the coming talks fail. The question is if the Trump administration has left any political room for Xi Jinping to manoeuvre without China looking weak. 
With US mid-term elections around the corner, we feel the US president will also want to look tough on trade and protecting US jobs, appealing to his base for support, at a time when Republicans look likely to lose the House majority. 

Our market in Japan also staged a late bounce last week with Topix once again bouncing above that ¥1,680 support line which it had tested many times this year. However, as we noted last week, with the index posting lower highs ever since May, we think possibilities of a major breakdown is increasing by the week. In Japan, geopolitics also continues to dominate market mood and with US trade talks with Japan about to begin this week, we think investors will remain understandably cautious. 

Moving away from the bigger picture stuff, we have seen more signs of slowing semiconductor demand with analysts seemingly rushed to downgrade both their earnings projections and their ratings, finally waking up to the industry's cyclical downdraft which we have been addressing for the past few months. One of our big short sell calls in the sector is Sumco (3436) which saw a number of rating cuts last week as some sell-side analysts had reassessed their super bullish wafer price increase projections as big capex hikes by the giant Shin-Etsu (4063) looks imminent. One of our long picks which we think should strongly benefit from wafer output hikes is Tokuyama (4043) which sell silicon ingots to wafer makers like Shin-Etsu, making short Sumco/Long Tokuyama still an attractive fundamental pair in our view. 


Besides the obvious auto sector, another market segment which we believe is most likely to be feeling trade-related downdraft is automation. With global trade routes being redrawn, we suspect many automation plans among Chinese factory owners to be put on hold. This comes on top of the cyclical slowdown in Chinese industrial activity. In Japan, there are no shortages of liquid cutting-edge factory automation plays to short like Yaskawa (6506), THK (6481), or our top short Daifuku (6383) which we continue to view as overvalued, especially given its gearing to SPE segment.

Another name we like to touch upon on again is Sony (6758) which has been in our buy list since early 2014 when its gaming network growth potential suddenly dawned on us. With its share price testing its 11 year highs, we expect Sony to be breaking above its key Y7200 resistance and zoom towards Y10K. With much of its gaming network expansion costs now behind us, we expect the sub-divisional profit margins to expand as revenues grow in line with more game downloads and its rising PS Plus subscriber base. A name which we have successfully recommended shorting against Sony is Panasonic (6752) which we feel is far more B2B and exposed to slower automation trend, not to mention, Tesla's rollercoaster ride and increasing competition in teh auto battery segment.