October crash that never came while we temporarily remove Softbank from our shorts

US stocks edge higher led by techs and industrials as Japanese names follow suit
The S&P 500 continued to inch closer to its all time highs as tech stocks continue to lead the way up while other cyclical names, namely deep value industrial plays shrugged what looked to generally weaker earnings and move higher, leaving the more defensive sectors behind. This trend is also be being played out in our own market in Japan with Topix once again out-performing US indices and Japanese stocks looking generally well placed to plough higher.

Fears of October crash has come and gone as market poised for year-end rally
With earnings results coming from the US market looking fairly respectable, one major obstacle to global stock market rebound seems to be clearing away. Indeed, October which many market observers had expected to provide much volatility seems to be drawing to a close with a more upbeat tone as expectations for a Phase One trade deal between US and China seems to be in the bag while the Federal Reserve seems to have enough reasons to lower its fund rate further this week. We believe this backdrop leaves the market poised for a year-end rally that should further help push Japanese stocks higher.

Japan to continue to outperform US stocks with our Topix target 15% higher by year-end
Looking back, our adoption of a bullish posture on Japanese stocks in late August, after nearly 18 months of a much more cautious strategic stance has proved to be well timed thus far. We retain our positive outlook for the rest of the year with our target for Topix being just above 1900 level, coming close to its Jan 2018 highs when semiconductor and other tech names peaked, leaving the index with close to 15% upside. We also continue to expect BOJ to do nothing in terms of further easing in its coming board meeting this week, instead we expect the central bank to continue to curtail its long-dated JGB purchases which have helped Japanese financial stocks to provide another engine for market’s rebound. 

We temporarily remove Softbank from our short sell list 
Although we don’t tend to address our individual recommendations in this publications, we like to touch upon one of our highest conviction short sell calls, Softbank (9984) which we have had in our list since February of this year, ever since its big buyback program pushed its share price towards Y5500 level. Having fallen close to 26% from its entry point, notably under-performing Japan’s broader market, we have decided to temporarily remove this name from our shorts ahead of its earnings results which by now most know will be negatively impacted by big potential valuation write-downs related to WeWork, Uber, Slack and Guardant. 

A potential share buy back program to provide yet another shorting opportunity
Although we retain our bleak view regarding Softbank’s management and its opaque accounting methods, the key reason reason behind its deletion from our short sell list is because we think its management now look desperate enough to keep Softbank’s shares from falling further by potentially announcing yet another big share buyback program, possibly even bigger than the one announced in February which totalled Y600bn. With a portion of its shares held as treasury reportedly put up as collateral against more loans, we would view any attempt to shore up its value as desperate and likely to be very short-lived, providing yet another great shorting opportunity. Thus, we have moved to the sidelines for now, waiting for its earnings results on November 6th when any new buy back program is likely to be announced to try to offset the negative tone from its big potential investment write-downs.