14 September 2019

US stock market poised for a big breakout
The US stock market has continued to advance last week with S&P now trading at a touching distance of its all-time highs. With trade tension between China and US easing, ECB resuming its large QE operations to stimulate its region and expectations are high that the Federal Reserve will follow this week and cut rates by as much as 50bps as weaker economic activity looks to have spread beyond just the manufacturing sector, the US market looks poised for a big break out. We think higher lows this year, plunging interest rates and market's resilience to a barrage of bad news have left stocks looking bullishly poised.

With Bolton gone, Trump seems ready for talks with Iran
With the US national security advisor and a key foreign policy hawk, John Bolton having been shown the door, we believe the chances of talks between US and Iran, brokered by France initiated in the last G7 summit has increased dramatically. With Saudi and Israel likely to be greatly against such an outcome, it will be interesting to see how carefully Mr Trump will tread towards any possible negotiations with the Iranians. Although the prospects of a trade deal with China had led to a brief rally in oil prices, with the market already remaining oversupplied despite OPEC cuts, any easing of tensions with Iran and possible lifting of sanctions could push down oil prices towards their December 2018 lows.

As foreign selling subsides Japan start to outperform
As we have been underlining in our weekly publications during the past month, we have turned much more positive about the outlook of our own market for the first time in nearly two years. With overseas investors now underweight Japan and signs that domestic investors are gradually turning net buyers, Topix has started to outperform other DMs this month. We have thus retained our strategy of shorting what we would consider to be very overvalued low beta names which we think are positioned to generate strong alpha as the sector rotation towards more cyclical names continue.

Banks stocks begin to shine as BOJ has no room ease more
Moreover, last week's big moves in banks and other financial names which we have been positioning our L/S list for have left us even more optimistic about the outlook of Japanese stocks as the market is finally sensing that BOJ has no option left but to steepen the yield curve. Indeed, it is worth noting again that its oversized QE program has been running at full throttle anyway and it has already found it difficult to meet its bond purchasing targets, simply because there isn't enough domestic JGBs out there to accumulate.

Semiconductor stocks power on as memory market bottoming
Beyond financial stocks which we have increased in our list of longs, we also continue to remain fairly bullish on semiconductor names as there are unmistakable signs of chip demand recovering with high inventory overhang in memory market of the past 9 months looking to be turning around much faster than many observers had expected. With data generation continuing to grow exponentially, we are not surprised to see data centre and cloud-related demand leading the way. With foundry demand also looking firm led by 5G chips and growing use of EUV lithography, we see much more upside in tech stocks in Japan with the caveat that the continued geopolitical conflict between South Korea and Japan remain a risk for number of key Japanese players in the supply chain.

Factory automation firms bound to see a big wave of orders
We also continue to believe that we are at a cusp of a big wave in orders for factory automation equipment and parts as continued relocation of export bases catering for the US market out of China will continue, irrespective of any major trade resolution between the two sides when talks resume next month. As we have argued since early June, we think the most automated lines requiring the least amount of skilled labour are the first to be relocated and our L/S list has been positioned for this scenario since then with strong outperformance seen in this segment thus far. For more about our stock selections and recommended long/short picks please contact us.