Tech stocks should continue to outperform
With S&P mainly range bound since the start of May, many market observers seem to suggest that US stocks have overshot the most likely recovery scenarios, at least for the next 12 months. Indeed, we think without the discovery of an effective Covid-19 vaccine, it is obvious that safe distancing directives are likely to keep global economies operating at sub-optimal levels as lock-down regimes are lifted. Although the big spikes in share prices look to be behind us for now, we continue to believe that with gargantuan amount of money on the sidelines, reflected on US money market assets which have surged by over 30% from last February to record highs, downside risks for stocks also look fairly limited.
Nevertheless, our market strategy remains relatively cautious, still staying well away from most bombed out cyclicals/industrial names on a shorter-term investment horizon which this publication is mainly focused on and sticking with our winning and more defensive strategy of being overweight technology. Despite some valid concerns about a potential for technology cold war between US and China, we suspect Japan’s suppliers of capital tools and semiconductor materials could potentially benefit from this polarisation which is looking to lead to a build-out of more redundant and overlapping capacities both in US and China.
Indeed, Beijing seems to have accelerated its technology spending plans, looking to invest $1.4trn over the next 5 years to beef up its technology prowess in key segments. With demand for data centres already surging in both countries and 5G spending plans disrupted by the virus looking poised for a strong come-back, we see more scope for technology sector’s outperformance over the coming quarter.
Geopolitical tensions could ease after US presidential election
Come what may, tensions between China and the West look to remain at elevated levels, at least in the run-up to the US presidential election led by bipartisan policy in blaming Beijing for the pandemic. China’s latest move to impose a new national security law on Hong Kong that further threatens the region’s autonomy is bound to make matters worse. Already, US policy makers have threatened to reconsider Hong Kong’s special trade status and this could flare up regional tensions involving Taiwan and other countries in the ongoing territorial disputes in South China Sea. Not only global trade looks to be at risk once again as it did for much of last year but there is a growing prospects for a potential Covid-19 vaccine war between China, US and its Western allies that could become more divisive.
Despite the growing tensions, we think ultimately money talks and access to China’s huge market will remain a key consideration in preventing an outright trade war with Beijing. Indeed, China itself has remained relatively calm and diplomatic, reiterating their pledge to implement the first phase of the trade deal agreed with the US late last year which has been disrupted by the spread of the virus. Moreover, China is likely to continue to play it cool until the passage of the US election, hoping for more pragmatic heads to prevail after the chest-thumping comes to an end. Until then we don’t think China will likely to retaliate to recent US moves in further limiting indirect transfer of US technologies to Huawei as well as the recent bill passed by the US Senate that threatens to delist Chinese companies from the US stock markets that don’t comply with normal SEC accounting rules.
Global easing of lockdowns providing good long/short opportunities
As underlined in our 9th of May publication, easing of lockdowns are providing very exciting two way opportunities for long/short equity funds. One segment which we have already seen some decent alpha generation is within our ‘Great Outdoors’ theme that includes bike-related and sporting goods manufacturers. We have already seen strong anecdotal evidence suggesting that bike sales are not only surging in Europe but also in the US market while we think other sports-related firms are next in line to see the benefits of this trend towards allowing people to venture outdoors.
We have also argued that this trend could leave video game businesses looking exposed to a backlash from being cooped up at home for the past few months. This possible scenario was echoed last week by one of the world’s largest game developers, Take Two Interactive which despite its stellar quarterly earnings results underlined the risks associated with easing of lockdowns that could dramatically slow revenue growth in the coming months. Another related and interesting snippet came from the the analytics firm, YipitData that suggested that gross subscriber additions of Netflix and Disney+ have returned to pre-covid levels. One of our big pair trade calls in Japan which nicely captures the essence of the above strategy is Long Shimano (7309)/Short Nintendo (7974).