Higher rates rattle markets as economic activity slows
Although our bullish Japan stock market outlook is highly conditional on US longer term rates to be edging higher, the sudden spike in bond yields have jolted confidence in the US stock market which in turn has spilt over to our own market. From a growing energy crisis to global logistics bottlenecks, failing crops from climate change that have led to surging food prices and labour shortages in key service segments in developed markets, are all are elevating anxieties about rising inflation rates that look to become more embedded in the economies.
Meanwhile, economic growth is showing clear signs of slowing in the US and China, raising prospects of weaker corporate earnings. As US politicians haggle over the much-promised fiscal investments, some observers are questioning the timing of Fed’s tilt towards tapering. If this negative backdrop wasn’t enough, we still have Covid delta variant lingering, killing mostly the unvaccinated as some governments like that of Singapore are readopting stricter pandemic guidelines.
With the arrival of the dreaded month of October which has historically marked stock market convulsions, we remain highly vigilant of the external environment that could derail our rosy Japan stock market outlook for this quarter. However, for now, we retain our bullish stance, and continue to believe that cyclical, value plays as well as post pandemic reopening beneficiaries will likely outperform the market for the rest of the year.
Kishida’s cabinet picks point to China hawks’ growing clout
At the end, Fumio Kishida’s appointment as the new leader of the ruling LDP party didn’t come as a major surprise with party elders choosing to stick with domestic policies that promise continuity and little divergence from the tired old Abenomics doctrine. With the all-important Secretary General post going to an ultra-conservative revisionist, Akira Amari, we continue to see much more room for an escalation of geopolitical tensions between Japan and China.
Although we were disappointed that the outspoken reformist candidate, Taro Kono, strongly backed by the party’s younger lawmakers didn’t manage to win the leadership race, we don’t think Kishida’s appointment puts an end the growing revolt among the party’s young Turks demanding reform. Indeed, should LDP perform poorly in the Lower House elections next month, we would not be surprised to see a major realignment of the party’s political factions that could once again threaten the status quo.
Come what may, however, we continue to see growing risks for tightening of export restrictions regarding high-tech capital goods to China which could severely dent the earnings growth prospects of related firms in Japan. This political climate leaves us even more cautious of technology names which have steadily grown in our list of recommended short sell picks as prospects of weaker end-demand exposing the likely over-ordering could lead to a notable earnings disappointment in the sector in near term.