22 April 2018
We retain our negative stance on the market as we continue to see heavy head winds, especially from the US, keeping up selling pressure on momentum names that have led the bull market of the past few years. With US interest rates across the yield curve rising, and an inversion starting to look increasingly likely by the year-end, we think liquidity is looking likely to be sucked out of capital markets and thus, volatility should remain at fairly elevated levels. As we also highlighted last week, we think the markets are pricing in much of the strong corporate earnings, especially in the tech space where we have put together a good list of our short sell picks which we feel will fall much lower.
At home, popularity of Japan’s Prime Minister continues to plunge as scandals engulfing MOF officials seem to be deepening with talks of sexual misconduct at the ministry now dominating news. With North Korean missile crisis look to be abating as talks of denuclearisation have begun, one major factor for last year’s abrupt surge in Abe-san’s popularity is now quickly disappearing. As BOJ is still doing all the heavy lifting in terms of economic stimulus, we think inflationary pressures building up will force Japan’s central bank to begin tempering its oversized quantative easing much earlier than what its chief, Kurodo-san is guiding for.
As we have also underlined in the past two weeks, the Y$ rates seems to have bottomed out in the very short term despite market’s risk off mode which we had originally thought should push yen’s value higher, possibly towards the 100 line or stronger against the Greenback. Although some suggest that the yield differential seems to be finally attracting investors back to the US dollar, we remain unconvinced. With some key emerging market currencies suddenly under intense selling pressure, we suspect there are other under-currents that have kept the yen in check for now.
Moreover, as we have also noted, surging short term rates in the US, partly due to the US Treasury Department flooding the market with short term paper, has made foreign currency exposure hedging too expensive to expect Japanese interest in US treasuries to suddenly surge. We thus, remain unconvinced that the yen’s rally has come to an end. We also suspect, Japan’s multinationals are likely to adopt a more cautious outlook for the Y$ rate for their 3/19 earnings forecasts, ranging somewhere between 100 to 105 level which should keep their next term’s projections at relatively modest levels.
Last week’s earnings results from key tech names such as LAM Research where sequential quarterly order growth seems to have peaked out also spooked the market. TSMC’s latest earnings numbers and guidance added more concerns, especially regarding Apple-related orders which account for just over 20% of the foundry giant’s revenues as all signs seem to indicate that the smartphone boom is all but over and we will probably never see another iPhone super-cycle, last experienced when larger screen iPhone 6 models were launched.
With smartphones’ capabilities having reached levels that users simply do not need more powerful terminals, this segment of the market resembles that of the PC market 10 years ago when consumers no longer felt the need to upgrade their hardware. There are other reasons to be cautious in this space as the recent US ban on American companies selling parts and software to China’s ZTE could spark a retaliatory move which could directly jeopardise Apple’s position in China or Chinese policy makers could pressure the country’s domestic smartphone champions not to buy components from the likes of Qualcomm, Qorvo, Broadcom and Marvel.
With NAND and DRAM memory prices edging lower while LCD and OLED panel pricing seem to be coming under intense pressure, we think investors should generally remain short the related names in Japan and we have built a good list of sell candidates in this space. With our scenario for Japan’s long term yields finally breaking above the key 0.1% and possibly surging towards 0.5% by year-end, we continue to suggest seeking refuge in big financial names like insurers and banks which will benefit from a steeper yield curve and will not be hugely impacted by overseas investors’ selling of Japanese stocks. To view our recommended long/short list as well as our suggested pair trades, please contact us.