Inflation remains key to performance of growth vs value
In US markets, the tug of war continues between inflation hawks who worry about rising prices being currently seen almost everywhere and those who view the recent surge in consumer prices as only transitory, caused mainly by the re-opening rush and pandemic-led supply chain disruptions. Even though US economic data of late have fallen short of initially high expectations for post-Covid recovery and have eased concerns about rising rates, it is difficult to see why the 10-year US treasury yield is still trading below its pre-pandemic lows. It is also difficult to ignore the rising input costs which are being passed on with more ease and look to be moving downstream.
In the meantime, US capital markets are continuing to show bubble-like characteristics that have for months been flashing signals of liquidity excesses building up in the system. It is also very interesting to see assets held in US money market funds having surged from December lows and are not far from May 2020 highs when the pandemic-led asset allocation panic to safety peaked. With capital inflows to US stocks also reportedly shrinking, institutional investors seem to be turning more cautious while animal spirits among individual investors continue to run wild.
Our stock selections in Japan is fairly agnostic to the above uncertainties as our market looks far more attractively valued and more importantly, is more economic sensitive which we think leaves it ideally positioned for the next 18 months. This is especially the case as Japan’s consumer price inflation have remained subdued while the yen has been fairly weak again, looking poised to renew its March lows against the dollar. Nevertheless, we are keeping a close eye on the US macro picture and its long-term rates as sentiment can turn hawkish fairly quickly which in turn could lead to a dramatic performance divergence between value and growth stocks.
Japan’s policy makers ignore calls to call off the summer games
Some think that Suga-san and the ruling party have now come too far to turn back on Olympics, taking a massive gamble that the summer games can be staged safely. As we have previously pointed out, irrespective of the outcome, Suga’s days as Japan’s PM look numbered and should the games be staged as planned, he will probably be kept around until September to take the fall for any potential mishaps. However, the outcome of the games could also have serious implications for the ruling party itself with Lower House elections only four months away.
The good news is that given staging the games have become government’s top priority, vaccination rates have finally been surging. Although this shift into action has reportedly come too late to prevent a potential super spreader event in late July, it is nevertheless easing concerns about Japan’s medium-term prospects for normalisation. We think there still is a chance that policy makers come to their senses and cancel the event. In such a scenario, we suspect Japan stocks will actually surge as investors realise that Olympics is a sunk cost and that prolonged lockdowns are far more costly and the removal of this distraction to focus on beating the pandemic is indeed a good thing.
However, if the games are indeed held as authorities currently suggest, we think the market could trade sideways as the uncertainty of how safely they have been held will linger at least until end of summer when its full impact should be apparent by then. Nevertheless, with mRNA vaccines having proven to be fairly effective against all Covid variants and other jabs also being re-sequenced to better target the new mutations, we think these Covid-related concerns should provide a good entry points for the long Japan trade which we continue to advocate to global investors.