16 December 2018
With Japan's Topix dropping below that psychological ¥1600 support and testing its crucial 200 week moving average of around ¥1570 level, any hopes for a year-end rally have all but evaporated. With Japan's market remaining as cyclically sensitive as ever, fears in the US for weakening economic activity and slower earnings growth have been amplified in our market.
Although some stale bulls have gone as far as calling the US market "wrong", we all know that the market could remain so far longer than many of these participants can remain solvent. Indeed, the closure of many L/S funds this year have partly underlined the complacency of continuing with 'buy on dips' strategy and managing a more a leveraged long fund than a hedged one. Even now we are hearing that many money managers have retained their net long exposure.
At Asymmetric Advisors, we retain our cautiously negative stance which has dominated our market strategy from early part of this year. We have strongly felt that understanding the impact of fast changing geopolitics will prove crucial in navigating through these weaker market trends. We think this will certainly remain the case for 2019.
Although prospects of much more productive trade negotiations provide some hope of at least evading a full-on trade war between the US and China, we highly suspect that the damage to corporate confidence is already done. Moreover, a more dovish US Fed stance which some bulls were celebrating not long ago is spawning its own negativity through a likely inversion of the yield curve which drains liquidity from a system which has seen unusually high liquidity in the past 10 years.
Moreover, given the reflexive nature of stock markets, we suspect falling share prices could have their own impact on confidence and ultimately capex as equity financing comes becomes more restrictive. We also think that confidence to keep buying back shares could also be undermined by prospects of lower share prices.
Come what may, in China, signs of expansion plans being put on hold has become increasingly evident. More recent talks of Chinese government considering delaying its big expenditure program on key technology segments to appease US policy makers could also spell bad news of many Japanese equipment and component suppliers. China's notably slowing growth in private consumption has also left any immediate economic recovery prospects in doubt as financial conditions for middle income household have become more stringent.
Not surprisingly, the latest Tankan outlook suggest mood among Japanese corporates is also turning sour. The trend in economic activity in Europe is equally discouraging with politics again playing a key role in key countries like Germany, France, Italy and the UK.
Having honed our shorting selling skills during nearly 20 years of Japan's bear market, we see more shorting opportunities on the horizon as we look to exploit not only weaker earnings prospects of many of Japan's cyclicals whose analysts' average earnings forecasts look increasingly unrealistic but also focusing on some of the perceived defensive issues which the recent market turmoil has pushed to unsustainably elevated valuation levels. For our complete list of long/short ideas in Japan, please contact us to be added to our trial program.