We remain overweight cyclicals while reopening plays are looking good again
It has been a fairly confusing market more recently with stock indices moving sideways and rotations between sectors quickening. Fears of slowing fiscal stimulus in face of growing inflationary risks have hit cyclical names which have been leading the way up during the earnings season. Moreover, with long bond yields levelling off for now, technology names have staged a notable bounce last week above some of their key support levels which took us by a surprise.
However, we stick firmly with the view that improving economic activity in US, China and EU is likely to to leave deep upstream cyclicals, also viewed as value plays as the most attractive segments of the market for this year. Moreover, despite the growing spread of different more contagious Covid variants, it is looking increasingly evident that the vaccines are proving effective, especially in massively curtailing fatalities.
With many more Covid vaccines coming, with Novavax likely to be next in line, we think we will be facing an oversupply of Covid jabs by year-end. Moreover, with exiting jabs likely to be recalibrated for Covid’s new strains, we see re-opening plays likely to lead the way along with economic sensitive names from here. However, in the case of Japan, the decision to go ahead with the Olympics or not could have a big impact on the direction of our market as we explain below.
Cancelling the Olympics likely to be viewed positively
The most recent polls suggest that over 80% of the Japanese public now oppose staging the Olympics, leaving the country’s government and its ruling party vulnerable to a potentially damaging backlash, ahead of the Lower House elections deadline by the end of October should law makers go ahead with the event. Indeed, we now see the potential cancellation of the games in a much more positive light as avoiding the risks of a super spreader event will be seen as generally a positive outcome that leaves the country focused on battling the pandemic and help lift the state of emergency in cities that are far more damaging to the economy than the sunk costs of the Olympics.
With Moderna and AstraZeneca’s Covid vaccines having finally been approved by the Japanese authorities, and the government forced to put into place some aggressive mass vaccination plans in hope that Japan will soon be allocated more jabs by its Western allies, plans to go ahead with the games thus far are at least greatly helping the country to sharpen up its act. Come what may, Suga-san’s days as Japan’s PM look numbered beyond summer as the likely absence of spectators in the Olympics stadiums and increasingly nervousness by its sponsors of being associated with the unpopular event, leave little chance for its commercial success.
We think the ruling LDP party is most likely to either replace Suga-san immediately if the Olympics games are called off or wait until its conclusion and its potential aftermath before picking a new leader in September. We are also most interested in fate of the powerful secretary general, Toshihiro Nikai who has been a big force in support of the summer games. Having also been a notable proponent of forging closer ties with China which seems unsustainable given geopolitical headwinds, his potential loss of political clout could usher in a more hawkish Japan that could strain ties with its biggest trading partner.