26 March 2018

As we highlighted last week in our first weekly publication, we think concerns about rising US trade barriers and general geopolitical worries both in Japan and the US will weigh on Japanese stocks and the currency market. With the Y$ rate now below that key Y106 support again and breaking the psychological support level of 105, we continue to see the Japanese currency strengthening further thanks partly to its risk-off status, potentially hitting the 100 level, possibly breaking below that parity over the course of the next few weeks. 

We also think that most Japanese corporate earnings forecasts for 3/19 term will be based around Y100 level, and subsequent hedging policies by exporters could add natural selling pressure on the US dollar against the Japanese unit. We suspect that the weaker dollar trend, which goes against rising US rates is clearly pointing to other risk factors beyond just trade concerns. The combinations of prospects for the widening US budget deficit following recent tax reforms, more hawkish US trade and foreign policies and fast rising US short term rates, are all providing strong headwinds. 

For now we continue to recommend avoiding going long the momentum names in tech and machinery space like semiconductors and robotics. We see notable downside potential in stocks like Softbank (9984) which is not only exposed to rising interest rates but also to a big potential correction to tech stocks which could leave its Vision Fund vulnerable to serious under-performance. With its heavy debt load being refinanced at higher rates, we think Softbank is not only unlikely to close the valuation gap with its underlying holdings in names like Alibaba (BABA), but it could be one of the first stocks which Japan value funds are likely to dump should momentum in tech stocks really breaks down. 

Last Friday's continued correction in US tech sector was led by the much loved Micron after its earnings disappointed some analysts, especially concerned about ASP in its NAND business which had more than offset double digit quarterly bit growth.  Although growth in expansion in memory applications have market participants very excited, we suspect the saturated mobile market which is not only huge in scale but also rich in bit content will take its toll on the overall growth and will temper expectations. With 3D NAND yields generally improving, at least at Samsung, we expect the over-supply in NAND to continue, while the DRAM profitability looks to be peaking this term.

We think shorting Advantest (6857) could be a good way to play this potentially big correction in memory-related names where positive noise for them had reached fever pitch this month. Another segment in tech space which we continue to believe is due for a big downturn is the LCD market and related capital equipment names as the market looks to be getting flooded with Chinese panels over the next 18 months and the last of the 10G fab investments run their course. We have remained highly vocal in looking at both Sharp (6753) and Ulvac (6728) as potential short sell candidates.

Another area which we also mentioned last week as looking vulnerable to the current market climate, as well as exposed to potential disruptions from electrification trend is the Japanese auto segment. We think Subaru (7270) is amongst the most exposed here thanks to almost all of its competitors looking to strengthen their model line-up in SUVs and pick-ups, just at a time when oil price looks to be heading higher, the yen strengthening and US auto loan delinquency rates spiking to 10 year highs. With very little exposure to EVs, we think Subaru’s positioning looks weak both in short and medium-term. 

For our full list of our recommended long/shorts ideas, please contact us.