Reddit swarm quelled as investors focus back on vaccination programs
After last week’s fireworks sparked by what seemed to be an uprising by US retail investors, the stock market quickly found its footing as we suspected it would. As memorable as the short squeeze attacks by the swarm traders were, taking on the mighty investment elites, it has left many late comers in the Reddit investment forum nursing big losses and quelling the rebellion, at least for now. Most hedge funds have quickly readjusted their short positions and some even smarter money, look to have made big profits on shorting the related names into the squeeze.
However, most investors have shifted their focus back on slowing Covid infections and accelerating daily vaccination rates which has risen to 4.7mn daily jabs, with over 1.4mn of those administered in the US. As we have argued, although Covid’s second wave has proven more contagious and deadly, somewhat similar to the trend of the Spanish flu of 1918/19, we think we have past the worst of the pandemic as most vaccines have proved generally effective on all strains, especially in halting severe cases while more mRNA types are being recalibrated for the newer mutations.
As we have been highlighting in the past month, both J&J and Novavax seem also likely get their vaccines approved for emergency use before the end of the quarter, leaving more vaccines on their way. With Russia’s Sputnik V vaccine also proving to have a surprisingly high efficacy rate while China has granted permission to use more of its homegrown Covid jabs, we think we will see a dramatic rise in supplies while vaccination programs become ever more efficient. With not long left before passing of the winter season, we think we will see much progress to contain Covid by the end of this quarter. We continue to see these factors keeping the stock markets on a steady and upward trend, led mainly by deep cyclicals, travel and leisure plays which have made up the bulk of our recommended longs since the start of the previous quarter.
US big tech facing structural headwinds
Although the definition of techs in the US is far broader in scope, in Japan they mainly comprise of components, semiconductor-related and other tech materials which makes it easier to address. However, as far as the big US tech is concerned, we suspect greater regulatory scrutiny on their ability to police content as well as their usage of customer data are bound to provide some major headwinds this year.
The recent spat between Apple and Facebook caused by the smartphone giant’s coming plans to raise firewalls for its iOS users, preventing the likes of FB and Google tracking its customers’ behaviour could also have big consequences for those that feed on such data. Meanwhile, Apple itself is under pressure to widen its program of halving its royalty fees (to 15%) to include all app developers while regulators are carefully looking at its mandatory usage terms of ApplePay.
With these ongoing major issues combined with more positive outlook in general on economies potentially re-opening, current conditions could lead to a more notable rotation out of tech stocks and could be the start of the sector’s earnings multiple contraction. Although their downside risks might be limited in absolute terms, we think they should lag a rising market from here, at least for the rest of the quarter.
Japan semis and display-related names still looking strong
As far as the semiconductor market is concerned, fundamentals still look solid. Big Data spending has resumed as inventory correction in memory chips seems to have come to an end. The ending of the pandemic is also likely to improve 5G smartphone demand from the second half, help offsetting a likely weakness in sales from work-at-home products. Moreover, fast recovery in sales of automotive and industrial chips, not to mention, the coming tsunami of EV model launches have all led to major surge in utilisation rates and increasingly more notable capacity shortages.
To be sure, Trump’s blacklisting of China’s key chip makers like SMIC are partly to be blame for these production bottlenecks. It will be interesting to see if the Biden Administration addresses this by quietly taking the pressure off and allowing resumption of businesses and granting sales licences for supplies to those blacklisted by the previous US administration. We were surprised to hear that Sony was strongly hinting last week that it has resumed sales of its image sensors to Huawei. We think it would be natural to see that while Mr Biden adopts a tougher stance on broader issues with China, individual Chinese companies are unlikely to be singled out going forward.
To underline the obvious, broader shortages in semiconductors should only mean more capex which it leaves tools and materials suppliers in Japan nicely placed. Another lesser-known phenomenon is the growing shortages of flat panel displays which is also leading to rising panel quotes and leading to plans for more capacity. Here too, Japan’s tools and material suppliers look strongly positioned. So although we suspect that technology names in general are likely to underperform Topix which is already in touching distance to our 1900 target for this quarter, we do like some of the key laggards in these sub-segments which we think could provide big positive earnings surprises in the months ahead.