Moving on from BOJ we address other key global issues
This week we want to move away from BOJ’s regime change and our call for an end to Abenomics to address other key issues driving global markets. Most importantly, with US inflation rates heading back up again, chances of easing in rates by the Fed now looks slimmer than ever and as we have long argued that 2% inflation target remains ambitious. Suddenly, a 50bps rate hike look to be back on the table to speed up the climb to Fed’s desired terminal rate.
Incidentally, this should further pressure BOJ to abandon its “transitory inflation” narrative as Japan’s own inflation rate looks to be heading towards 5% which we had targeted back in summer of last year. We also believe that the order of magnitude in rate hike prospects in Japan is far greater than in the US. This should lead to much stronger yen this year. Meanwhile, Japanese currency has recently given back some of its gains as the dollar has rebounded in line with this change in US inflation outlook.
We think it makes sense that industrial stocks which tend to be more value-oriented outperforming while tech stocks which have also had a big bounce since last October are looking vulnerable again. Although bulls are looking at inventory adjustments to end by first half of this year, we think that major clearing of stock is bound to exhaust any pick-up in demand fairly quickly and that should keep capacity utilisation rates relatively low in 2023. This makes any V-shaped recovery in tech earnings looking fairly unlikely this year. This is certainly the case for Japan’s multinationals which look vulnerable to a dramatic rebound in the value of the yen since October of last year.
It is important to note that geopolitical tensions are also running high as US is hardening its resolve in trying to keep China at bay. Also as noted a few weeks back, Republicans in the House of Representatives had quickly gathered bipartisan support to establish a select committee on “Strategic Competition Between the US and China”.
We think this committee will likely pass big legislations to expand on the existing export restrictions, attempt to limit US private investments in Chinese entities and ultimately accelerate the decoupling of supply chains away from China. Indeed, the growing consensus among policy makers in totally banning TikTok is yet another important development that could provide us with further clues of how quickly this growing ideological rift will disrupt global trade and services.
Moving on from macro and geopolitics, another exciting development we are watching carefully is Microsoft incorporating ChatGPT AI into its Bing search engine. Initial feedback has been very positive sighting a more engaging user base, seeking qualitative information rather than just seeing mundane related ads to search requests. We are curious to see how disruptive this could prove to Google’s giant Search-Ad business. Also, given Google platform’s dominance in global advertising, this potentially drastic change in search behaviour could have a profound impact on the whole industry.