Japan Databook: "Summer storm" eases but risk of rising US rates emerges

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Japan Equity Strategy

Japan Databook: “Summer storm” eases

but risk of rising US rates emerges

Investment Strategy

Factors: Value up sharply, AI stocks down sharply

While value factors rose across the board, one-year returns and beta deteriorated

sharply (mainly AI stocks), creating a split (Exhibit 1, Exhibit 2). This is the exact opposite

of the picture through the previous month.

Return ranking: Decliners dominated by AI

AI disruption-related sectors such as IT services, games and IP rose sharply. Domestic

demand sectors, such as retail, food and services, and value sectors, including autos and

steel, were also strong. Decliners were dominated by AI. The stocks that led the AI rally

(memory, MLCC, SPE, electric wire names) were sold off the most (Exhibit 5, Exhibit 6).

Revision ranking: AI and domestic demand sectors recover

In addition to AI stocks, such as memory, electric wire and semiconductor production

equipment (SPE) makers, earnings forecasts improved for IT services, construction,

banks, securities and retail names. Autos, pharmaceuticals, electric power, oil and coal

products, paper & pulp and cement deteriorated (Exhibit 7, Exhibit 8).

US yields jump as they price in an uncertainty premium

AI stocks rose sharply on 31 July. The positives were (1) strong earnings from major US

tech companies (a possible shift to a “show me the money” mode where investment is

acceptable as long as free cash flow is secured) and (2) a dovish FOMC meeting. The

N/T ratio also returned to an average level and the “summer storm” appears to have

eased (see our 30 July Japan Equity Strategy report).

On the other hand, risk is causing US yields to climb. At the press conference held after

the FOMC meeting, Chairman Warsh said the Fed would stop providing guidance so as

not to add noise to market reactions, and that he wanted to read the information being

emitted from the market. However, yields jumped after the press conference, pricing in

a risk premium associated with the scarcity of information (an uncertainty premium) and

the potential risk that the Fed fails to take concrete action. Reporters repeatedly asked

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