Poor visibility and changing spending patterns proving challenging

The same factors which we addressed in our last publication continue to weigh on stock markets in the short term. As we pointed out then earnings visibility is the poorest it has been for a long time and it is logical to assume earnings multiples will continue to contract in the near term as a result. US corporate earnings season have failed to bring much good news while tech stocks continue to sell off.

Indeed, FANG names which have been a strong pillar for the overall market in the past two years have largely unveiled disappointing earnings results and guidance. It is also more evident that the end of pandemic restrictions for much of the West have brought with it a normalising consumer behaviour that is hurting on-line sales and streaming of content. 

More broadly, we are also seeing a shift in end demand from durable goods towards leisure and travel. Indeed, these service industries are now starting to experience their own bottle-necks, namely labour shortages that are bound to exert more upward pressure on inflation. Also, this shift in spending patterns comes just as household budgets look to be under pressure from rising living costs which could further hurt sales of durable goods. 
One interesting reflection of that is the dry bulk shipping sector which we think is fertile grounds for shorting opportunities. Although most big shipping firms are posting strong earnings thanks to continued elevated freight rates, they are also warning of coming declines in shipment volumes as global economic activity slows. 

Moving on to our market in Japan, the yen continues to devalue against the dollar due BOJ’s ongoing policy errors of suppressing long-dated JGB yields. Although weaker yen is likely to flatter earnings of Japan’s multinationals by magnifying their overseas revenues and profits, it is also raising household costs which is hurting consumption which makes up for over half of the economy. 

Ultimately, we see the currency devaluation forcing Japan’s central bank to abandon its QE policy and allow longer term interest rates to rise. With Japan’s CPI looking to surge past BOJ’s targeted 2% rate, we suspect we are getting very close to this capitulation which should lead Japan’s financial sector to strongly outperform the broader market.