As US stocks melt up, investors in Japan are more cautious of contagion
The US stock market’s liquidity-driven melt-up continues as investors have brushed aside worries about the Covid-19 virus, and are further encouraged by the stronger earnings season, prospects for more tax cuts and an accommodative Federal Reserve. However, our market in Japan has tread more cautiously as the economic toll of the virus on the domestic economy as well as the Asian region continues to pile up. As we highlighted for much of last year during the bubbling trade spat between US and China, Japan’s economy is far more intertwined with that of China and its trade with the country much more significant than that with the US.
To be sure, we feel that almost everything about the virus itself has been absorbed by the market in the time frame that we had initially set out which we have now just passed. However, as we also noted in last week’s publication, looking at share prices of number of businesses which are highly reliant on outsourcing from China or those selling their goods and services in the country, or indeed those highly exposed to tourism business in Asia in general, the likely prolonged impact of the virus do not seem to be fully appreciated as a v-shaped recovery which the market is hoping for is looking increasingly doubtful.
Chinese and Asian business activity likely to be plunging
Even outside of China, in HK and now in Singapore, growing fears of the spread of the coronavirus have sent shockwaves to consumption in those economies. Here in Singapore which we write this publication from, rumours of the government looking to elevate the status of the virus to ‘code red’ have left foot traffic at shops and restaurants visibly much lower. In HK for example, its prolonging school closures to mid-March have left many international schools operating in the city worried about permanent loss of students as many ex-pats could simply pack up and go back home, especially as demonstrations in the previous year had already pushed many to reconsider living in the region.
But it is China where much of the economic damage has been sustained as government measures to restrict movements in individual cities to contain the virus has said to have become even more stringent despite more positive government statements about the slowing spread of the virus. Economists have been revising down China’s GDP growth outlook for the current quarter to just above 4%, a level which still looks optimistic given the ongoing restrictions. Nearly 86,000 domestic and international flights in and out of China have been canceled between late January 23 to early last week, representing 34% of scheduled services.
Alibaba, which reported earnings last Thursday and in our view provides an excellent pulse for Chinese consumption also warned that since the epidemic emerged in January, the virus has significantly undermined production as workers can’t get to or perform their jobs. The e-commerce giant also pointed to dramatically changing buying patterns with consumers notably pulling back on discretionary spending while many merchants that work with the company have not been able to return to normal operations because of a shortage of employees.
Topix likely to move sideways for now
With restriction in movements and travel set to continue for some time to come, it is difficult to assume a v-shaped recovery in activity or Japanese corporate earnings for now. Although we retain our strategy of remaining long growth rather than bargain hunting value stocks, one which has continued to pay good dividends, we can’t see Topix breaking out from its current holding pattern until fears that have gripped the Asian region start to subside.
We don’t see this happening possibly until mid-March while restriction of movements within China and from China to other countries are unlikely to be removed until sometime in the middle of next quarter, perhaps in early summer, depending on how successful the containment programs prove to be. This leaves the earnings picture looking fairly grim until we reach H2 of this year where signs of gradual recovery in spending patterns begins to emerge.