Stocks regain footing after a major oil wobble
Following a turbulent start to the week after an unprecedented plunge in the oil price, the US stock market which continues to lead the direction of global markets quickly regained its footing. S&P managed to close the week above its 50 day moving average while VIX fell to its lowest level since early March. As we noted last week, bears remain on the retreat as talks of what looked to be a typical bear market rally coming to an imminent end to pave the way for stocks to test new lows have given way to less pessimistic scenarios.
Although key negatives factors are clear as most state shut-downs continue, weekly US unemployment surges further, albeit at slower pace, while small businesses are said to be struggling for survival and most have yet obtain relief loans from banks, so far market participants have chosen to look beyond these major issues. As we have noted in the past few weeks, as long as the Federal Reserve continues with its unprecedented liquidity injection and more government-sponsored relief loans are on their way, it is difficult to see any notable pullback in the very short term, even in the face of a very poor corporate earnings season which has more or less been factored in.
The news from the pandemic front has also been more positive as infection curves are flattening in major US states as well as key European countries while number of fatalities are clearly falling. However, the late sudden sell-off observed on Thursday following leaked preliminary findings from China that Gilead’s Covid-19 drug has not been as affective in treating the sick as some had hoped, was a rude reminder that the market is now expecting some good news on the treatment front as results from large clinical trials currently taking place are being highly anticipated. Needless to add, these findings from number of vaccines and treatments which have entered clinical trials over the past month will be a key swing factors for sentiment as flattening of infection curves under a more draconian lockdown regimes have largely been discounted.
Tech stocks shine as investors ponder the post-pandemic world
The past month has certainly been an ideal market for capturing alpha as relatively stronger fundamentals in the tech space has provided a good shelter for under-invested equity funds being forced to put money back to work. This also been observed in our own market in Japan where investors are actively looking for beneficiaries of the current economic climate.
As faster migration of commerce to the online world becomes increasingly evident, safe from dangers of the spread of the virus, this trend has triggered a profound rethink among corporate executives and investors about the post-pandemic world. What were deemed as appropriate corporate office space capacities are being recalibrated as lower costs of employees working from their homes are being increasingly regarded as a more permanent long term solution in improving productivity. This in turn is providing investment opportunities in key technologies and cloud infrastructure which help accommodate this seismic shift which looks have a profound impact on how businesses are conducted over the next decade.
Big Data expansion and 5G likely to support future investments
The same trend is being observed in education and medical care where fast growing service offerings in these segments are being provided on-line. In-home entertainment services are also shining bright in this severe recession which is also leading to an exponential growth in data traffic. As we have argued for much of this year, all these factors are likely to boost faster broadband investments while pushing Big Data in adding more cloud capacity by investing more in their data centres.
Thus, we continue to believe that investments in semiconductors, both for processing data as well as storage will remain on a solid growth path both for medium and longer term, even as global recession becomes more severe in the coming months. Although this pandemic has to some extent disrupted the pace of 5G investments as noted by the likes of Ericsson last week, we also believe capital investments in this wireless protocol will make a comeback, albeit at a slower pace given faster wireless speeds are more needed for industrial applications than for consumer products such as smartphones which are currently more connected to home wifi networks than cellular basestations.
Key negatives that keep us awake at night
It is important to note that we regard our continued bullish view on technology names mainly a defensive strategy where there is some visibility and underlying growth as explained above. This is somewhat misunderstood as historically, being long tech meant being long cyclicals. However, as long as there is no overwhelming evidence of a cure or a vaccine for Covid-19, or indeed a well defined exit strategy from the current lockdowns, we are unlikely to turn positive on economic-sensitive sectors and change this posture.
To be sure, we see plenty of potential negatives ahead with our more immediate concern stemming from the virus currently ravaging through third world nations which besides its human tragedy, could bring with it shortages of food and key commodity supplies in the coming months, not to mention, possible regional conflicts. We suspect that as the contagion has spread from wealthier nations to poorer ones, soft and hard commodity markets will see an impact shift from a demand shock observed in the past few months to a supply shock in the near future. This will potentially bringing with it higher prices and a stagflationary scenario which have yet to be fully pondered.
We are also increasingly uneasy about politically motivated growing anti-Chinese sentiment in the West which we fear could lead to rising trade tensions and weakening global cooperations which we regard as vital in beating this pandemic. With US elections now only a few months away, we see China-bashing as one obvious strategy being adopted by Republicans in an attempt to divert attention from US government’s slow response to the virus. EU’s stance against China has also hardened due to reported price gauging of medical goods, not to mention, concerns about recent detainment of HK’s key democracy activists.
Coming second wave and Japan’s incompetent government
However, our main concern centres around the virus itself, its mutations which have thus far brought three key strains with the one in Europe (which has been exported and observed in NY) reportedly more fatal than the others. We wonder if the vaccines and treatments in the works are keeping up with shapeshifting pace of this pathogen.
We also worry about the coming second wave after the summer which could bring with it a more deadlier strain as it did in the 1918 pandemic, especially as global leaders are under increasing pressure to gradually open up their economies. With the most recent waste water testing being conducted in the US and Europe which we think provides the most comprehensive big picture analysis, strongly suggesting that total number of infected is in order of magnitude greater than the official tally, we fear any premature easing of lockdowns could easily trigger a resurgence in number of fatalities.
As far as Japan itself is concerned, as we have noted previously, we think it looks to be the last likely G7 nation to come out of this pandemic. We continue to regard Abe’s government as hugely incompetent in the way they have tackled this crisis, something we have strongly argued ever since the mishandling of those infected on the Diamond Princess cruise ship in February which made it clear then that the government cares more about the economic impact of the contagion and the outside perception of Japan than the loss of lives of its citizens. With its hospitals reportedly inundated already and its total number of tests thus far having yet to surpass 150,000, a figure that South Korea conducts in a week, we think Japan will struggle with this contagion for months to come and we doubt Abe will manage retain his post as Japan’s prime minister by the year-end.