Coming vaccines and treatments buoy hopes for 2021 recovery
With last week’s Covid vaccine and treatment announcements, rekindling hopes for normalisation, S&P finished the week near its all-time highs first reached in August and just below its crucial 3600 resistance line. Meanwhile, the massive snap-back in cyclical stocks helped push up the Dow Industrial towards its February pre-pandemic highs. Although the VIX fear gauge index remains elevated relative to its life-time average given the ongoing risks such as the raging pandemic and January’s transition of power in the White House that promises to be far from smooth, the index does look poised to head towards its crucial 20 level which if breached, it would signal a major risk-on sentiment.
Clearly, vaccines cannot come soon enough as Covid infections are spreading fast across the US, Europe and some parts of Asia. In the US, daily tally is nearing 200,000 cases and hospitalisations are now widespread, increasing in 49 states in the past week. Reports suggest that one in 5,000 Americans is currently hospitalised with Covid, the highest ever ratio. With a number of other vaccines in the pipeline that are at their last stage of clinical trials using the same approach as Pfizer/BioNTech of so-called messenger RNA, hopes are high that their results, soon to be released will show them to be as highly effective.
As devastating as this new Covid wave has already proven to be, we believe this autumn surge which has tracked in line with what most scientists had dreaded back in the summer and the new lock-down directives, mainly put in place in Europe are more of a “known known”, we think market sentiment is unlikely to be notably dampened from here. Indeed, investors seem now fully focused on Covid vaccines and therapeutics trial results, timeline for their launch, and plans for distribution and inoculation, hoping to put an end to the pandemic sometime by middle of next year. How quickly, the poorer nation will have access to the same drugs is anyone’s guess but as usual the market is less concerned about that.
Japan’s highly cyclical stock market should remain best performing
As we have argued, we think the global rebound in cyclical names bodes well for Japan which apart from perhaps Germany is one of the most highly geared developed markets to ‘return to normalcy’ trade. Since August our strategy has entailed moving our suggested Japan stock holdings away from more defensive and highly valued technology names towards deep value cyclical shares. With Japanese firm being particularly exposed to trade with China and Chinese economy looking increasingly on a solid recovery path, we have felt that our market will prove to be one of the best performing, especially in dollar terms as we expect the yen to remain firm for the rest of the year.
With the earnings season proving to be generally positive with many firms pointing to recovery in auto-related demand and capital goods while Japanese consumer spending has been showing steady signs of stabilising, we think the bottom-up perspective to our stock picks also corroborates with our top-down view. With the incoming Biden administration likely to remove some uncertainties regarding US trade policies as well as reverting back to stricter environmental guidelines that Japanese firms tend to abide by, we think there are more positive aspects to keep in mind as we move into next year. Moreover, with Suga-san’s government pushing for digitalisation of government institutions as well as encouraging regional lenders to consolidate, there are other domestic angles to Japan’s stock market that keep us bullish on our own market.
With Topix last week having finally closed that bearish window formed back in February, we think the broader market looks poised for further gains. Indeed, we would not be at all surprised to see the index break above that crucial ¥1740 resistance line in the near term and power on finish the year by as much as 10% above current level, near its January 2018 peak of ¥1900 when the prospects of US trade war with China started weighing on the market and cyclical names in particular.