Covid-19 dominating headlines and keeping the fear gauge elevated
For the seventh week in a row, our weekly publication remains dominated by the Covid-19 outbreak. As we pointed in our first issue in covering the subject on 26th of Jan, the spread of the disease will cast a long shadow over global stock markets regardless of what happens elsewhere as we reversed our bullish stance on our own market in Japan.
Nearly two months later, with total number of infections globally having risen above 100K, the spread of the pathogen has wrecked havoc across the globe, with panic leading to an economic paralysis, particularly in the service sectors which looks to be tipping the G20 economies into recession. Given that US stocks is leading the Japanese market up and down, we remain highly focused on that market, looking for cues for short term direction.
With the VIX fear gauge index having been testing the ten year highs of 50 level, and the yen reclaiming its safe haven status and testing the critical 105 level against the greenback, investors are clearly petrified. Brent crude oil price has also tanked to its three-year low of $45 a barrel as the OPEC meeting last Friday failed to form a consensus for more production cuts with Russia refusing to reduce its output.
The US central bank is doing what it can by cutting its discount rate by 50bps points to keep ample liquidity in the financial markets. Judging by falling 10 year treasury bond yield, testing new historic lows of 0.7% level, more immediate cut of at least another 50bps now looks to be on the cards. However, in Europe and Japan, room to ease monetary policies remain almost non-existent. This could keep the yen strong for a while, especially as ‘risk off’ mode remains highly prevalent.
Virus containment programs among most key nations look notably inadequate
In any case, central banks can’t do much about the virus. Although in that department, China’s draconian measures in limiting movements and keeping millions of its people in a state of quarantine in their own houses seem to have dramatically slowed down the spread at its source, other more economically advanced nations, namely US, Japan and Italy have looked particularly ill-prepared despite having ample time to get ready.
On the other hand, countries such as Singapore and Taiwan have established a gold standard in tackling the outbreak fairly quickly with robust measures such as keeping a close eye on those entering their borders, temperature checks at entry points of most public places and comprehensive contact tracing and quarantines for those potentially exposed. Even in South Korea where over 7,000 reported infections leave the country with second highest cases in the world after China, rigorous testing across the nation have left fatality rates at less than 1% of total, providing another good example of a successful containment program for a hotspot nation.
Japan policy makers more concerned about Olympics than virus containment
Perhaps besides the US where the Trump administration seems more concerned about putting up a brace face in declaring that the situation is under control ahead of the presidential election and desperately trying to talk the stock market back up, nowhere has the containment measures have been as poorly handled relative to the wealth and resources available as in Japan. Not only its containment program on the virus-stricken cruise ship proved disastrous to begin with but by letting hundreds of its own citizens who had tested negative and were asymptomatic at the time to disembark the ship without further quarantines, and allowing them to take public transportation home, policy makers had unnecessarily exposed the nation to the pathogen early on.
Indeed, during our own very recent trip to Tokyo, we were shocked to see that at the immigration check-points in the airport where finger prints and facial recognition systems are in place, there were no hand sanitising stations after finger prints are scanned, potentially exposing thousands crossing the border. Moreover, given the acute shortages of face masks in the country, Japan hospitals seem to have rationed them to only one a day for nurses and doctors. From what we have learnt thus far, having a face mask on for more than an hour where masks become damp, the dangers of pathogens spreading through them rises dramatically, especially for those who are in close contact with sick patients. With school closures also putting pressures on many nurses who have to tend to their own children at home, the situation could get worse if shortages of staff hit hospitals.
In the meantime, Prime Minister Abe’s cabinet seem to have been more pre-occupied with reassuring the public and IOC that Japan’s summer Olympics is on course as planned, even as WHO is coming under increasing pressure to declare a pandemic, something that the global health body has clearly tried to avoid for political reasons. Abe’s latest move in planning to quarantine those travelers entering Japan from China and South Korea, two places where the contagion seems to be more under control now only highlights the government’s reactionary stance to this very fluid global event. Although Iranians need a visa to enter Japan and obtaining them has probably become more difficult, by not including Italy in that list also shows that the Japanese government remains very much behind the curve.
We retain our call to buy secular growth stocks in the technology space
Last week, we mentioned that we suspected the US stock market is close to its bottom and investors should take advantage of the recent global stock market corrections to begin bargain hunting some core secular growth sub-segments which we feel the virus is unlikely to derail from their growth path. One key area is data centre spending and cloud computing capabilities.
Indeed, we believe data generation could actually accelerate in the months ahead as remote-working regimes being put in place by corporations to combat the spread of the virus and strong demand for in-home entertainment have all reinforced the need for more data processing and cloud storage capacities. We also believe that semiconductor-related capex should remain relatively unscathed as chip makers also benefit from this structural uptrend. Interestingly, we have not detected any signs of weakness in spot prices of NAND or DRAM memory chips with both segment continuing to trend higher.
Reinforcing this assumption, we have seen early signs of this resilience through surprisingly robust guidance by firms such as Soitec, AMD, Marvell and LAM Research, all pointing to minimum disruptions from Covid-19 thus far. Although the impact of the virus has already been felt in the consumer technology segments, namely in smartphone components underlined by weaker guidance from the likes of Skyworks and Qorvo as disruptions to the supply chain combined with a demand shock in China have drastically hurt sales of such devices, we think even here sales are likely to rebound before year-end and 5G growth plans for next year look to be firmly intact.