Politics clouding the market outlook
US politics has regained centre stage as policy makers have yet again failed to agree on extending the Covid relief spending programs while the recovery in the US labour market slows in a wake of surging infection rates. President Trump has signed a last minute one-week stop-gap spending bill to avoid a government closure, kicking the can to December 18th. Meanwhile, the US Supreme Court has rejected the lawsuit filed by Texas to nullify the election results in swing states, providing yet another resounding defeat in courts to the Republican-led challenge to keep Mr Trump in the White House.
With Electoral College members due to vote in the coming Monday and likely to officially declare Mr Biden the winner of the US presidential race on 5th of January, anxieties about a contentious transition of government are once again being elevated as the outgoing president remains defiant, refusing to concede defeat, continuing his claim of election fraud. The potential for civil unrest, possible adoption of more draconian foreign policy measures against China and generally opting for scorched earth tactics that could impact the stock market in the latter days of the Trump Administration which we addressed in our November 22nd publication are some of the short-term concerns investors seem to be grappling with.
Reflecting the above anxieties, the VIX fear gauge index which had tested its crucial 20 level support line in the past few weeks, has once again started to creep higher. Although earlier in the month, there were reports of big inflows into equity mutual funds and related ETFs, much of the most recent buying seem to be coming from retail investors, especially within the IPOs which some seasoned market observers have deemed to be dangerously overheated. Meanwhile, institutional investors have reportedly been unwinding some of their big equity bets ahead of the year-end book closing while AUMs in US money market funds have shown the first notable uptick since July.
Looking for a strong start to 2021 for Japanese stocks
Despite the recent US stock market wobble which as always tends to reverberate across all global equity markets, including our own, we remain bullish on Japan. With still huge amount of cash sitting on the side-lines and overseas investors still notably under-weight in Japanese equities, we see little downside risk in stocks going into next year. Moreover, with number of Covid vaccines now under way for approval while clinical trial results for other promising vaccines due in January and Chinese economic recovery picking up steam, we think the highly economic sensitive nature of the Japanese stock market leaves it well positioned to continue its out-performance relative to most other developed markets for the coming quarter. This is despite our stronger yen outlook which we think by early next year could leave the ¥$ rate testing the crucial 100 line.
Although time is running out for Topix to reach our ¥1900 target level for this year, we still think there is room for the broader market to surprise on the upside in the latter days of 2020. Technically we see the ¥1800 line which Topix is at a touching distance of, as a crucial resistance level which if breached should take us to ¥1900, a level last tested in early 2018 before the spectre of a trade war between US and China dragged global cyclical names down, dragging Japan down with it. Come what may, we expect Topix to be as high as ¥2000 level by the first quarter of next year led mainly by cyclical sectors.
We should also note that although we turned very positive on technology stocks at the very start of 2019 until August of this year, we have generally tempered our enthusiasm on tech stocks since late summer and have since been raising our recommended long exposure to names deemed to be highly cyclical in nature, not to mention, travel-related plays which we also see as very strong recovery plays. We remain generally negative on shares of companies viewed to be stay-at-home beneficiaries, particularly video game stocks which are strongly represented in Japan and which we believe are fertile ground for short sell picks.