Complacency no more!
Although in our last weekly publication we suggested that VIX index or the fear gauge was still indicating that complacencies lingered in the US market regarding the impact of the virus, and v-shaped recovery hopes were all but wishful thinking, the market more than made up for that in the past week’s trading, posting the fastest and biggest ever stock market correction since S&P hits its all time high on 19th of February. Even we who have lived through Japan’s twenty year market correction and consider ourselves seasoned bear market participants hadn’t seen anything like this change of sentiment in such a short period. The deleveraging of the investment portfolios were all but evident as no sector was spared in the ensuing sell-off while the end of the month rebalancing only added more downward pressure.
Indeed the economic paralysis that the fear of the virus has brought with it, impacting everything from disruptions in manufacturing activity and supply chains, to freight and shipping, all the way to tourism and leisure, more resembles the financial crisis of 2007-8 when financing arteries of the global economy suddenly clogged up. Last Friday, WHO finally raised the dangers of a global contagion of Covid-19 to ‘very high’, but for what seemed to be more politically motivated reasons, it has stopped short of calling this a pandemic. However, it more than evident now that the market has quickly priced in a pandemic which has gone beyond just spreading in two continents to qualify for the term.
Politicians waking up to dangers of the virus uprooting them
In our own market in Japan where policy makers have dithered for weeks, trying to put up a brave face in fear of losing the chance in staging the Olympics this summer, and following grave missteps which had only exasperated containment efforts, the officialdom finally pressed the panic buttons. Prime Minister Abe which has been largely absent from addressing the virus during the Diamond Princess debacle, finally ordered closing of Japan’s schools and cancelling events in hope of slowing the spread of the disease which the official tally seem to be under-estimating by a big factor.
Indeed, both in the US and Japan, the initial blasé approach by policy makers towards the virus is becoming increasingly scrutinised. Nowhere is this more crucial than in the US, ahead of November’s presidential election where plunging stock prices and slowing wage and employment growth have become a grave threat to Mr. Trump’s standing. He in turn has blamed much of the panic on the growing popularity of Senator Sanders in Democratic Party’s nomination race. Indeed, having put Vice President Pence in charge of the containment program, Trump has clearly put his deputy’s neck on the chopping block in case the Covid-19 contagion goes communal in order to avert any direct blame.
Secular growth names in technology look poised for a big rebound
Much of our own efforts in the past month have been to identify shorting opportunities in Japan directly related to the virus and to provide some ideas for downside protection for hedge fund portfolio managers. Obvious segments more fertile for this strategy have been picking those names with high gearing to consumers in China or inbound tourism from China, or those with strong general exposure to leisure industry such as theme parks, gym and cinema operators. Thus far, the strategy seems to have done its job in helping to dampen the negative impact of the broad sell-off which had also engulfed growth names in technology sector which we like more than ever, especially given their lower valuations now.
Although we don’t want to give too much away in this freely available weekly publication, we think there are already strong signs emerging that the market is bottoming led by key tech stocks in the US which rebounded nicely during last Friday’s sell-off. As we have pointed out, although fears of the virus will undoubtedly slow economic activity in the months to come, secular growth in data generation will continue as it did during the trade spat between China and the US. We have thus begun to recommend a more aggressive buying stance in segments of semiconductor-related and production equipment which we believe will show the first signs of recovery, way before any industrials do. Thus, in terms of general investment strategy we continue to believe that growth will outperform value stocks which in any event, have failed to provide any downside protection thus far.