Tin hat time as stock markets sell-off accelerates

US stock market turmoil continues as worries about the coming US rate hikes have led to further selling pressure in growth names and tech stocks which is weighing on overall sentiment. Dip-buyers have remained on the side-lines as Nasdaq index plunged to its June levels and below its 200-day moving average for the first time since pandemic-related fears briefly gripped the market back in March 2020.  

Indeed, one has to go back to late 2018 when concerns about Trump’s trade war had dragged Nasdaq  below that symbolic trend line. In other, more speculative corners of global asset classes, it is worth underlining the recent break down in crypto markets that could provide a useful pulse for individual investors’ sentiment. 

Another indicator of growing risk aversion in our own market has been the notable sell-off seen in smaller cap stocks in Japan with Mothers index now down by over 30% below its peak in November and testing its key ¥800 support line which it had last breached during the early days of the pandemic Although cyclical and value plays are outperforming growth in line with our playbook, quickly souring mood is forcing Japan’s domestic investors to take refuge in more defensive plays like utilities and food names whose shares have actually seen an uptick last week. 

These developments look ominous and have not been part of our Q1 scenario, although we had expected growth and tech stocks to struggle this year, especially past the coming earnings season which may now provide a brief relief rally and a potential opportunity to unload more shares. Clearly, a more defensive investment posture is warranted and we have fine-tuned our short-term strategy to reflect this by further raising our recommended weighting in shorting high priced growth and tech names in hope to hedge against further weakness in the broader market. 

With overseas investors’ interest in Japan having been waning ever since Kishida-san was nominated as the country’s premier during the last quarter, it seems unlikely that more reasonable valuations will help Topix in the shorter term hold above its key support line of ¥1900 which it had been bouncing on since October last year. However, in the case for dollar-denominated investors, a persistent risk-off mood should provide some buffer in Japan as the yen is likely to strengthen further, regardless of the widening gap in nominal interest rates. 

Moving on, as we have been highly anticipating, the latest data from the global Omicron wave continues to point to an imminent end to the pandemic due to Covid variant’s less severe symptoms, shorter incubation and hospitalisation periods which have led to lifting of restrictions in countries like the UK. However, this positive development has also further fuelled fears of much tighter monetary policies to come with a likely faster drainage of market liquidity by most central banks. 

Although Japan’s government has kept its borders shut to overseas visitors, encouraged by high public approval ratings for such restrictions, some of the ruling party’s big-wigs, namely Shinzo Abe have begun to call for re-opening of the gates and removing pandemic-related measures. As Omicron infection waves have soared in the country like elsewhere, hospitalisation rates have also remained fairly benign. This has also helped re-opening and travel plays which have most recently shown notable signs of bucking the market’s downtrend.