18 November 2018

Global events continued to dictate the direction of Japan's stock markets as peaking US corporate earnings, less accommodative US monetary policy, slowing Chinese economic activity and continued concerns about the future of free trade have all darkened the mood. With Brexit anxieties elevated as the UK Parliament is about to vote on May's deal and worries about the Italian government breaking EU's fiscal discipline, there is not much confidence in developments in Europe either.

Last week we addressed the growing concerns about rising issuance of US Treasuries binds which we argued could also exert its own pressure on US long term rates. With US junk bonds also faltering, clearly the negativity has spread deep in the capital markets now with talks of buying stocks on dips having given way to selling on any strength.

There are some hopes that US policy makers will turn less hawkish and could strike a trade deal with China in the coming G20 meeting at the end of the month. However, judging by pointed speeches given in the latest APEC summit by the Chinese leader and the US Vice President, it looks like the best we can hope for is a delay in higher tariffs due in January.

With Japan's stock having been historically sensitive to economic cycles and average corporate earnings forecasts for next term generally looking optimistic, we remain highly cautious, avoiding tech and machinery names which have dominated our short sell picks for much of this year. Although we have reduced some of our recommended shorts in this space, we have held on to some key picks like Advantest (6857) and Taiyo Yuden (6976) which we feel have much more downside.

However, we have generally moved on from shorting cyclicals to more special situation names which we specialise in and prefer. One which we like to address this week is Nintendo (7974) which we last added to our short picks on 17th of Oct. Thus far the name has fallen by over 20%, half of which came on Friday when Nvidia's guidance for a glut in graphics chips raised further concerns about sales of its Switch game console which as Nintendo's last quarterly results had shown is flat-lining on a YoY basis.

With sales of 3rd party titles on Switch having mostly flopped, we think outside game developers will not be hugely encouraged to support Nintendo's hybrid console, especially when it comes to exclusive titles. With PC and PS4 dominating platforms for core gamers and mobile games on IOS and Android dominating handheld gaming, we think most Nintendo bulls have lost sight of realities facing the business. We would be surprised if life time sales of Switch surpassing those of Nintendo's pure handheld platform, 3DS which has shipped over 70mn units in nearly 8 years after its launch. To view all our long/short ideas in Japan, please contact us through our website menu.