3 key pillars behind our long strategy

Japanese market climbs further; 3 key pillars for our long picks
Although US stocks continue to find resistance with S&P failing to clear its 3000 resistance line, our own market in Japan is making steady gains helped by rising hopes for a trade deal between US and China which has had a big impact on Japan’s highly cyclical stock market as freezing capital outlays has provided a major drag on corporate earnings of capital goods suppliers. We turned positive on Japan after nearly 18 months of negative stance in late August and we remain so today as we continue to see strong signs emerging that indicate earnings are bottoming out. This week we will zoom in on three key segments that much of our long picks are derived from.

Exponential growth in data generation paving recovery in tech names
We see these positive signals nowhere more so than in the technology segment which has been one key pillar of our recommended long portfolio strategy. We believe this segment is clearly being energised by recovery in data centre spending on cloud capacity as suggested by our own latest channel checks which indicate strong orders emerging for the current quarter. Indeed as we have argued with data generation, especially those derived from the mobile space continuing to grow exponentially, we expect this segment to show the most rapid recovery going into next term, especially in the memory IC segment which has been in a glut for much of this year.

Data growth can only accelerate next year as 5G buildout gains momentum
Indeed, the latest report by Ericsson post its strong earnings results seem to support the view that data generation from the mobile segment will remain a key growth driver for the industry. Moreover, as the Swedish telecom equipment giant also underlined, spending in 5G is accelerating, especially in China and this next generation mobile protocol can only accelerate data generation even further by next year, lifting all boats in the cloud infrastructure space, not to mention, paving the way for growth in IOT.

ASML & TSMC underline rapid recovery in demand for cutting edge tools
Strong bookings for EUV lithography tools shown by ASML last week also strengthened our resolve that migration to finer nodes by chip makers, namely TSMC, Samsung and Intel are already helping the overall market for tool spending. This was closely followed by TSMC’s own quarterly update which showed that capacity booking for cutting edge lines have shown significant strength and could account for a whopping 25% of this year’s revenues. In fact the Taiwanese foundry giant raised its 2019 capex forecast by a whopping 40% as demand for high-end smartphones both for Apple and Huawei as well as rapid ramp up in 5G chip production have all raised confidence in dramatically raising its outlays.

Factory automations and robotics orders likely to be bottoming out
We also believe the recovery in semiconductor spending will help improve another major pillar of our long strategy which is factory automation and robotics. Although we have yet to see any concrete signs of this segment showing a rebound in bookings, second derivative comparisons seem to suggest that orders for this segment are bottoming out. Indeed, we think that the secular growth in automation which spans beyond just semiconductor production lines will resume in earnest as capital expenditure freeze due to trade uncertainties will start to flow again and we see relocation of some export capacity out of China also helping to boost orders for this segment.

BOJ tapering and weak yen leaves us bullish on financial names
The last pillar of our long strategy is more macro-based as our long-held belief that BOJ must abandon its oversized QE program and focus on engineering a steeper yield curve is starting to pan out. This thesis has left us bullish about Japan’s mega-banks and insurance firms which have dramatically underperformed the market since BOJ’s adoption of its zero rate policy. With the central bank having dramatically cut its purchases of long-dated JGBs in the past month or so, the ten-year bond yield is showing a notable rebound and we suspect could move to positive territory by year-end. What is most encouraging and indeed surprising is that during this time the Japanese currency has not only not strengthened, but has managed to depreciate against the dollar, removing one key concern that BOJ has had about tapering.

* To view our long/short strategy and stock selection please contact us through our website for a free trial.