Japanese manufacturing stocks look vulnerable, especially autos and semiconductor tool makers
Despite most recent headwinds from stronger yen on shares of exporters, the Topix has generally held on to its November gains, closely following the US market’s broader melt-up on a sudden shift in interest rate outlook for next year. Meanwhile, there has been much encouraging activity among listed Japanese firms in raising their shareholder returns by announcing more buybacks and some, choosing to delist through an MBO.
With Japan Exchange looking to name and shame firms with low returns by next spring, we suspect listed firms are accelerating their reforms and adjusting payouts. Moreover, growing pressure from activist investors are also starting to yield results in hastening the restructuring.
However, as we have noted although Japan remains attractive from the corporate behavioural changes that are taking place, the bigger picture looks poor for the exporters that are well represented in key stock market indices, especially the Nikkei. If indeed, the yen has finally bottomed in anticipation of converging rates between Japan and the West, then we think we will be seeing heavy selling in shares of exporters.
As we have previously noted, one notable segment that fits this is autos which have seen a boom in unit sales this year, mainly due to latent demand built up from chip shortages of the previous two years. With US sales likely to slow from here, we think much good news look baked in and one very big segment of Japan’s stock market which goes beyond just autos and auto parts, and span across many other industries could struggle for much of next year.
Another very important stock market segment among Japan’s manufacturers are semiconductor tool makers (SPEs) which like autos have been one of the key engines of Japan’s rally this year. We also think SPEs are seeing unsustainable level of sales, mainly supported by Chinese chip makers. To be sure, SPEs earnings are not as forex sensitive. But with Chinese hoarding of these tech tools reportedly continuing until at least next quarter, we think a big amount of planned purchases of chip manufacturing tools have been front-loaded and could slow dramatically from next year.
There are also obvious risks of export bans being more fiercely enforced and for stricter ones to come into play which could disrupt the current high flow of sales of semiconductor production equipment to China. Indeed, the latest call by US commerce secretary, Gina Raimondo, demanding a bigger budget to better police US technology export controls to China, was very interesting, underlining that even if that means lower revenues for the US firms.
She went on to warn Nvidia, regarding its H20 AI chip, specifically targeting China’s AI market that “if you redesign a chip around a particular cut line that enables them to do AI, I’m going to control it the very next day”. We think the indications are clear that tighter export curbs to China look inevitable, especially as Chinese chip makers are getting ever closer to producing chips using cutting edge nodes that the West is trying to prevent.
One other big issue facing Japanese manufacturers is weak Chinese demand which seems unlikely to show much recovery in the near term. However, the bigger problem Japanese capital goods and component firms are facing is the seemingly industry-wide attempt by the Chinese to aggressively adopt domestic alternatives which one can observe in areas like automation, EVs, and medical equipment.
