We continue to suggesting switching from techs to cyclicals
Although the VIX fear gauge seems to have shown signs of stabilising and cash parked in US money market funds continue to trend lower, further sell-off in US tech names has pushed Nasdaq below its 50-day moving average for the first time since April. More interestingly, as a more important read-across to Japanese tech stocks which tend to be more exposed to semiconductor-related equipment (SPE), materials and components, the SOX index is also falling below that key gauge while the S&P SPE sub-index has fallen below its more crucial 200-day line, indicating more potential weakness ahead.
With US tech stocks not leading the markets higher, in Japan we are clearly seeing a gradual and healthy shift towards the more bombed out cyclicals, retailers and travel-related names which we have greatly expanded within our recommended long picks in the past two months. Indeed, our negative stance in technology since early August, particularly suggesting shorting some major semiconductor proxies have been generating very decent alpha. To be sure, we retain this negative posture for now as we expect more downside risks ahead as we still sense a level of euphoria in tech stocks among investors that we tend to see at peak of the cycles.
Our key short term concerns remain the heavy inventory overhang of data centre-related chips, a resultant weak outlook in DRAM memory capex, potential for a big component demand plunge from the Huawei sales ban coming into immediate effect, generally weak Chinese smartphone shipments which have continued in August, over-optimistic expectations for Apple’s new 5G iPhones given the current tough economic climate, and the eventual cooling off of work-from-home demand in the coming quarter. Although we believe the long-term secular growth in technology remains fully intact, we feel that the alignment of these negative factors, together with growing hopes for Covid-19 vaccines to be made available over the next two quarters will continue to lure investors towards more undervalued cyclical names, a trend which is becoming more notable in Japan’s stock market.
Japan starting to outperform
Indeed, we have been pleasantly surprised by our own market’s resilience to the recent headwinds coming from the US. Although Japan’s stock market is naturally more cyclical and tends to do better when they outperform, we had initially feared that any major sell-off in US stocks led by technology names could provide a major short-term drag and also lead to a stronger yen. However, despite the dollar weakness against other major units, the ¥$ rate has remained firmly above 105 level during the most recent market sell-offs. Moreover, we are seeing signs of more domestic money coming in while the resignation of Abe-san as Japan’s PM has been taken calmly, something which we had been expecting.
These factors along with BOJ’s continued price keeping operations through its equity ETF purchases have led to strong support for Japan’s broader market measure, the Topix index which has held firmly above its ¥1600 support line and is starting to form a bullish pattern which suggests a possible assault towards its ¥1700 resistance level where it was trading around before the pandemic. With Japan being not only a strong cyclical market proxy but also that of relative value as stock market valuations remain undemanding and corporate balance sheets remaining generally healthy, we now think that these overlapping trends could push Topix higher.
As we also underlined in our last edition of our recently launched Video Diary (available on our website), Warren Buffet’s investments in Japan’s top trading companies came as a nice surprise and could attract more global value investors to the Japanese market. With the likely nomination of Yoshihide Suga as the next Japan PM this week, whom has been pledging more support for pushing the Abenomics doctrine by speeding up deregulation, but also lowering hurdles for consolidation of regional banks and emphasising more on digitalisation of Japan’s economy, we are starting to think that his nomination as the next leader could also inject some excitement into investing in Japan, at least in the near term.