US stock market melt-up continues
The melt-up in US stocks continue with S&P finishing the week above its important psychological 3100 level as hopes for trade talks progressing encouraged investors to put more money to work as the year-end rally we have been expecting looks to be nicely taking shape. In Japan, it was a fairly uneventful past week with Japanese stocks consolidating their recent gains as we pass the weakish earnings season somewhat unscathed. Having broken briefly broken above its Y1700 resistance, Japan’s Topix index closed the week just below this important psychological level.
Japan looks the most attractive among cyclically sensitive DMs
However, we retain our very bullish stance on our market, expecting Topix to continue to advance towards its early 2018 highs of 1900 by year-end led by cyclicals and financials. This scenario is based on our expectations an ongoing steepening of the yield curve as we addressed last week, a weak yen as ‘risk-on’ appetite grows, and improved trade relationship between US and China that should at least kick the can in imposing more US tariffs on Chinese imports. With valuations of Japanese stocks now looking the most attractive among DMs and far cheaper than even the equally cyclically sensitive German stock market, we urge asset allocators to increase their Japan weighting before its too late.
Fed’s report warnings of prolonged low rates addresses Japan’s problems
A report released by the US Federal Reserve last Friday precisely echoed our thoughts behind what we consider to be a significant regime change by BOJ in early September when its tapering of long-dated JGB purchases began. In its twice yearly note, the Fed report suggests prolonged low interest rates could lead to financial instability by eroding the quality of loan assets as it would force financial institutions to take on more risks to improve returns.
BOJ’s tapering to continue to help reduce credit quality risks
This is exactly what has happened in Japan in the past few years, with real estate loans reportedly surpassing the levels posted during asset price bubble of the 80s and forcing them into riskier collateralised loan obligations (CLOs) that have started to raise non-performing loans provisions as well as general credit costs. We believe growing concerns regarding quality of assets among Japanese financial regulators have forced BOJ’s u-turn in its QE program which is reverberating across the global sovereign debt market.
Softbank remains in big trouble in our view
This week we like to focus on Softbank (9984) again which we added back to our short sell recommendation list on 8th of November after briefly removing the name on 25th of October ahead of its quarterly results and after its shares staged a small bounce after its removal. We see the technology investment group remaining in big trouble in the months ahead as the IPO market remains effectively shut off to its generally loss making investments while leaving its fund raising efforts for the launch of its now vital second Vision Fund in great doubt. With WeWork which Softbank sunk another $8bn dollars in still fighting for its survival and US lawmakers looking to force Uber, its other big investment, in recognising its drivers as employees, we believe no amount of creative accounting can hide the closely followed problems facing its Vision Fund investments.
Softbank’s proposed merger with Line looks overhyped
In the meantime, the group is continuing to pursue its risky M&A strategy at home by looking to latch on more internet businesses to its empire now under its telecom unit Softbank Corp (9434) which has acquired Yahoo Japan (now named Z Holdings 4689) from its parent, buying stakes in struggling Askul (2678), Zozo (3092) and now proposing a merger with Line Corp (3938). The merger talks have been met with the usual fanfare and cheerleading by analysts who once again underlined promising synergies that will somehow lift all its boats and propel the group to dominate e-commerce and e-payments in Japan through what they dubbed as a one-stop ‘super-app’. We also have our grave doubts about such a scenario that would require great execution which Softy is not well know for.