We retain our negative stance in Japan’s tech stocks for now
If ever there was good anecdotal evidence of gauging whether valuations of US technology stocks had entered dangerously inflated territory, it was provided by reports of Softbank having been a big buyer of call options on stocks of the usual suspects that led the huge Nasdaq rally in August. When there is a tech bubble, Masayoshi Son is usually not too far away from the action. Having turned negative on Japan’s tech names nearly a month ago for the first time since start of 2019, when at the time we felt that trade war concerns of late 2018 had provided a great buying opportunity, since August we have been increasingly urging our clients to unload their holdings and for HFs to short some key proxies, especially semiconductors names which we view as vulnerable to weaker near-term fundamentals.
Recent reports that memory chip makers have seen their stockpiles reach nearly 4 months of inventory due to cooling off of data centre demand provided more reasons for concern. With stay and work-at-home-related demand for PCs and notebooks also likely to be close to peaking, we are in no rush to go long the sector. Moreover, with an end to Huawei front-loading its chips and components purchases ahead of this month’s US ban, we feel there is more headwinds on the horizon given the sheer size of its smartphone market share in China. We also feel it will take some time before Huawei’s handset business potentially winds down and other competing brands start to take its share. It will also be interesting to see if Apple can sell as many iPhone 5G models from October as it has reportedly indicated to its component suppliers given the weak economic backdrop and still very patchy 5G area coverage. We certainly feel that some projections for an iPhone super-cycle seem far too optimistic at this stage.
Positioning for a post-pandemic scenario
To be sure, as far as the Covid-19 virus is concerned, we feel that are not out of the woods yet. Indeed, we might yet see the pathogen mutate to a more lethal strain or the coming colder weather conditions in the northern hemisphere combined with opening of schools could lead to a major spike in infection rates as it has already done so most recently in some parts of Europe. However, we feel that we are inching ever closer to one or more promising vaccines in the pipeline to show good enough measure of efficacy and safety to pass the last stage of clinical trials and be ready for distribution either by year-end or by the first quarter of next year.
We are somewhat encouraged that even the seemingly rushed Russian vaccine named “Sputnik V” whose launch had met with initial scepticism by Western virologists and epidemiologists has reportedly shown very promising results in smaller trials. How lasting such inoculations will prove protective is anyone’s guess but at any rate, we are fairly sure that Covid-19 will not be eradicated anytime soon and like influenza it will remain in our echo system. However, we are also convinced that as medical experts continue to better understand the virus and its various effects, more advanced targeted drugs and treatment methods for at least its current forms of severe infections will help continue to reduce fatality rates as they have done so over the course of this year. The above scenario has left us confident enough to continue to recommend investors to actively switch out of technology stocks and stay-at-home beneficiaries to more bombed out cyclical, leisure and travel-related names.
Undoubtedly, there are still short-term uncertainties to consider, namely how quickly any vaccine can be distributed globally, especially in the third world which has been severely impacted by the spread of the pathogen. However, the harsh reality is that key global stock markets including ours in Japan care far more about the initial vaccine access of wealthier nations. Other risk factors which we would deem to be ‘known knowns’ include the potential for a much stronger yen, the current fiscal policy paralysis in the US which leave consumption levels vulnerable and rising geopolitical tensions in South China Sea which could easily flare up to something more serious, especially as we get closer to US presidential election in November. However, we think the more bombed out stocks in segments mentioned above are also in a much better position to outperform the market on the way down as they have shown in the most recent stock market sell-off.