Monetary and geopolitical regime change to dominate market trends

Why we see higher rates keeping headwinds heavy for growth stocks
Although inflation anxieties have investors fairly nervous, especially regarding tech and growth stocks, deeper cyclicals and value plays that dominate our long calls in Japan, have resumed their notable outperformance. Meanwhile, tech names are caught in a tug of war between generally healthy fundamentals on one side and higher long-term rates that on the macro front is creating great headwinds for growth stocks. As macro clearly still rules markets, we have removed even our most favourite bottom-up tech picks for now waiting for a big re-entry point which we think could prove much lower down. 

To be sure, we believe the monetary regime change, at least in the market’s perspective has already taken place with long bond yields look set for higher climbs. Meanwhile, we feel that the market has yet to fully digest a more inflationary environment, which whether it proves short-lived or not, is a rude reminder that deflationary forces of the past 30 years are long gone, and the generational bull run in treasuries now looks behind us. Beyond the pandemic’s distortions of trade routes, we see fast growing geopolitical political divide between the West and China wreaking havoc with the globalisation era supply chains. From this perspective, it’s difficult to see why rising prices will prove short-lived as our world’s trading system could be severely disrupted by fast changing geopolitical landscape and the biggest since China’s entry into WTO.  

Understandably, the Chinese have been hoarding chips, materials and manufacturing equipment, before supply restrictions to China become tightened even more. Meanwhile, for everyone else, the highly efficient ‘just in time’ strategies are being quickly replaced with ‘just in case’ provisions that through their redundancies, seem to be leading to bloated inventories while bottleneck from current shortages are hurting output. Nobody really knows if this is the new normal or indeed, the extent of the over-ordering in the tech components segments. But come what may, we see slower growth rates ahead coupled with poorer visibility that almost always lead to lower earnings multiples. Meanwhile, operationally leveraged and still relatively undervalued cyclicals are generally posting steep double-digit earnings growth. 

Changing of the guards in Japan is looking very near
Among our big top-down predictions for 2021, Japan prime minister Suga’s resignation was high on the likely list. Although this seems like a foregone conclusion now, the fate of the Olympics which we wrongly thoughts would be called off by March, still seems up in the air. With some estimates suggesting that as much as $20bn has been spent on the delayed summer games thus far, the government looks to be in no mood to consider the risks of a super-spreader event that the Olympics clearly represents. The fact that foreign journalists are likely to be on strict movement restriction while in the Olympics village also doesn’t sound very reassuring somehow. 

With Japan’s poor testing and tracing history, not to mention, its miserable vaccination planning, there is not any particular reason to be optimistic about the safety and outcome of the ever-unpopular Olympics games as things currently stand. We do, however, think that Japan is likely to receive big help from the US for its vaccination supplies fairly soon. we think Japan’s recent government backing of US on its more hawkish stance on China should have gone a long way to bolster Japan’s crucial strategic position as among the first in line of defence. 

But what is astonishing here is the political gamble that the ruling LDP and its senior members have taken, leaving Suga as the sacrificial lamb. Clearly, whether Olympics are held without a major incident or not, the fact that it is being staged regardless of public outcry and health concerns is likely to bring an end to his short reign as Japan’s PM. We are also hopeful that this could alter Japan’s political landscape which lacks a strong opposition to keep the ruling Japan party in check.