Japan remains fertile ground for L/S funds
This week we briefly look inwards and focus on our own Japan equity market. We have seen a big pick-up in outperformance in cyclical/value names last week which support our continued bullish stance on this segment. Nevertheless, we have tempered down our expectations for Topix for this quarter as the broader index looks to remain range bound for now, as we suspect selling pressure within the growth segments, particularly tech stocks, is likely to pick up pace, or at least underperform.
We continue to think current supply bottlenecks that could limit output growth and thus sales, together with potential for a big overhang from over-ordering in the recent scramble to secure chips and component supplies, have all hurt visibility. This also lends itself to the prevailing wisdom of selling richly priced growth stocks and buying cyclical undervalued names with high operating leverage while continued climb in longer term rates seems inevitable for this year.
The earnings season has thus far shown that economic recovery in US and China is leading to strong earnings growth momentum for long overlooked and deep Japan cyclical names that still trade at relatively modest valuations. Meanwhile, techs that have beaten estimates have done ok although those that have just come in line have seen profit taking and those that have undershot quarterly estimates have been severely punished.
All of the above paints a picture of fertile grounds for Japan long/short funds, with short strategies likely to prove vital in generating alpha. We see plenty of overvalued growth names out there with unimpressive earnings while deeper cyclicals are not only looking cheaper, but they are growing faster at this stage with better shorter-term visibility. For long/short global equity funds or indeed, Asia-(Xish) that have generally steered cleared of Japan, we suggest a more active stance in our market, if not for the quality of cyclicals to go long in, but for the deep markets that include, availability of borrow for short strategies which makes Japan so attractive right now.
US likely to come to Japan’s rescue for vaccines
With Japan’s Suga government having more vocally supported the US more recently as geopolitical tensions with China mount on, we strongly suspect Japan will receive a generous share of US aid for vaccines, especially with the summer Olympics around the corner. We think the Biden government will take advantage of this latest stumble by Japan in failing to secure enough vaccines earlier in the year, to show its support and solidify its position with a key ally in need in the region.
Although helping India and Brazil remain top global priority, we think a US announcement soon concerning helping Japan with immediate vaccine supplies seem likely. Obviously, we must always watch out for any own goals by the Japanese regulators as most vaccines including Moderna’s have yet to be approved. Barring that, we think re-opening plays, especially domestic names are likely to surge back, albeit perhaps briefly as flight risks have clearly risen and borders are getting tighter again and looks to remain so for the summer.
How exactly Japan is going to stage the ever-unpopular Olympics with such low vaccination rate, and if it does, will it be a successful one as they hope, are all keeping us currently focused on domestic political events. What is evident is that should the authorities go ahead with the plan and infections do surge, the already weakened LDP party will look most vulnerable with late October Lower House election deadline looming closer. Come what may, we think Suga’s term as Japan’s PM look increasingly numbered.