Some of our key topdown predictions and stock calls for 2023

With Santa Claus rally which we had been hoping for to provide us with big shorting opportunities at the start of 2023 now looking increasingly unlikely, we have started adding back the recommended short positions in growth names which we had temporarily removed from our list back in early November. Clearly, investors are concerned that even with inflation gauge having likely peaked and now rising at a slower pace, Federal Reserve looks to keep monetary policy tighter for longer as its 2% inflation target remains out of reach for the foreseeable future. Moreover, with US funds reported rebalancing needs ahead of the year end likely to bring more selling pressure in stocks in favour of bonds, we don’t see any reason now to be too cautious of being net short for the rest of this year.
This brings us to our traditional year-end predictions for 2023 in this last weekly publication of 2022. We were reasonably pleased with our calls made in December of last year (link above), calling for the end to the pandemic thanks to the milder Omicron variant, much more aggressive US rate hikes which at the time was a non-consensus view, more broader US export restrictions of technology to China and Japan’s new government economic policies which we thought are unlikely to be positive for the stock market. 

However, it should also be noted that it was not until February of this year when the BOJ began suppressing long term rates by its outsized JGB purchases when we began to call for much weaker Japanese currency, our biggest macro call this year. It has been our view since then that the outgoing BOJ governor, Mr Kuroda has been making grave policy errors by continuing with his yield curve control (YCC) operations which we thought would increase inflationary pressure in Japan and eventually wreak havoc in the JGB market once the central bank was forced to abandon its QE. This is certainly on the cards for next year. Here are some of the other developments we anticipate for 2023:

1) With only three months left to Kuroda’s tenure as governor, we think the dollar/yen rate which peaked at 150 level back in late October when US inflation fears began to subside is likely to fall much further from its current 136 level. In fact, with Japan’s wages likely to start rising from spring by as much as 3% and both minimum and part-time wages also heading higher due to structural shortages in Japan’s labour market, we think one major precondition that BOJ has stipulated in order to tweak its YCC will be met from Q2 of next year. This we think will keep the yen which has been highly undervalued in terms of purchasing price parity on an appreciating trend and we would not be surprised to see the dollar/yen rate falling below 120 level by next summer.

2) The above scenario could also prove fairly negative for earnings of Japan’s multinationals and exporters whose profits have been notably inflated by depreciation of the yen this year despite weakening overseas demand. In fact, with overseas demand for durable goods remaining anaemic at best and inventories still bloated we expect shares of Japan’s manufacturers to notably underperform those within the service sector in H1 of next year.

This will be even more evident should Japan’s long-term rates head higher which should help financial stocks (which are generally neutral to yen’s movements) to outperform. Although Japan’s government moved much slower than we had anticipated in dropping its Covid restrictions and opening its borders, we continue to believe re-opening plays which are geared to inbound tourism in Japan remain highly attractive. 

3) Moving on to China, Japan largest trading partner, we think bulls which have been recently cheering Chinese government’s latest move to drop its Covid Zero policy are likely to be disappointed with what could be a massive wave of Covid infections in the offing. This we think will weigh heavily on China’s consumption and economic growth, at least for the first half of next year. We also think Japan’s exports to China, which are mainly supplies of capital goods will remain fairly stagnant at best while broadening export restrictions of technology will weigh on bookings and could lead to big cancellations within Japanese firms’ existing order books.

There are also obvious risks of nastier Covid mutations as the virus spreads through its massive population with relatively low immunity. This could lead to other countries closing their borders again to Chinese visitors. Ultimately, we think China will be forced to rethink its vaccine policy by allowing bivalent jabs which have been developed overseas to be domestically produced and administered to its nation as it has been already in HK. 

4) In this year’s predictions list, we thought it would be fun to put out some short comments on some of our big individual stock calls including some global names that fall outside of our Japan mandate. As mentioned above we think China is likely to adopt overseas developed vaccines and BioNTech (BNTX) which already supplies its jabs to HK could be picked as the main supplier. 

We also suspect TikTok social media will likely be banned from Western markets given its lax content mediation as well as its alleged weak personal data protection procedures. Should this happen, we expect Meta (META) to strongly outperform, especially as we believe its big spending plans on virtual reality and metaverse could be significantly curtailed with its founder Mark Zuckerberg more likely to give up his CEO role. 

Another business which we think looks strongly positioned for next year is Singapore Airlines (SIA) which we see as a long-term beneficiary of Western firms increasingly relocating their Asian hub from HK to Singapore. With high paid executives having an easier time obtaining work visas in Singapore, we suspect SQ’s high margin business class load factor will look significantly more favourable than it did before the pandemic. 

We also see Apple (AAPL) coming under renewed pressure to cut its 30% royalty fees it charges 3rd party app developers on its iOS platform which will also likely to pressure Sony (6758) to follow suit. If we are right, this will have a big impact on Sony’s PlayStation gaming revenues of which 60% are derived from such fees. We will also keep a close eye on developments relating to the £5bn lawsuit launched against Sony in the UK last August by consumer rights advocates, alleging that its 30% royalty fees have kept game prices high and gamers out of pocket. 

Moving on, if market conditions for IPOs and venture capital firms do not improve soon, we see Softbank’s (9984) finances coming under more notable pressure, further forcing it to sell its most liquid assets to try to mitigate capital constraints, especially as we see its ARM Holdings’ IPO being delayed yet again in 2023. We think ARM could lose significant market share to RISC-V open architecture in the medium-term while its acrimonious lawsuit launched this year against one of its biggest customers, Qualcomm (QCOM) will certainly not help matters.

Finally, on behalf of all of us at Asymmetric Advisors, we wish our readers a happy holiday and a prosperous 2023.