Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<p>This week in StubWorld ...</p>
<p><a href="https://www.smartkarma.com/entities/toyota-industries-corp" target="_blank" data-smartkarma-citation="entities:4500:1" rel="noopener">Toyota Industries (6201 JP)</a> is up 37% in the past six months compared to ~4% for 8.5%-held <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a> and ~13% for the TOPIX. As a result, the implied stub is at a decade high.</p>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/175/733/original/image_39133792071606794763925.png?1606794767" class="editor-image img-responsive" data-smartkarma-image-id="175733"></figure>
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<div class="content-caption">Source: CapIQ. Lines for 6201 &amp; 7203 are base 100 from 10 years ago</div>
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<p>The stub expansion is likely driven by the demand for materials handling equipment, such as forklifts. Yet the implied stub ops have increased ¥482bn in value since late August. This is excessive. </p>
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<p>More below the fold.</p>
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<p>Preceding my comments on Toyota are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
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<p>These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.</p>
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This week in StubWorld ...
Toyota Industries (6201 JP) is up 37% in the past six months compared to ~4% for 8.5%-held Toyota Motor (7203 JP) and ~13% for the TOPIX. As a result, the implied stub is at a decade high.





Source: CapIQ. Lines for 6201 &amp; 7203 are base 100 from 10 years ago


The stub expansion is likely driven by the demand for materials handling equipment, such as forklifts. Yet the implied stub ops have increased ¥482bn in value since late August. This is excessive. 


More below the fold.

Preceding my comments on Toyota are the weekly setup/unwind tables for Asia-Pacific Holdcos.




These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.





StubWorld: Toyota Industries Unjustified Outperformance Vs. Toyota Motors

Travis Lundy

Quantitative Analysis

<p>Long-time Japan strategist Jonathan Allum, most recently of SMBC Nikko, put a guest post titled <a href="https://www.ft.com/content/a97cf336-518d-45dd-8092-ec0363c18725" target="_blank" rel="noopener"><em>Takeaways from 30 years of Covering the Japanese Market</em></a> in the Financial Times on 26 November (Thanksgiving) which is well worth a read.</p><p>He points out that foreign investors in 2020 are likely going to be net dis-investors in Japan for the fourth year in five, fifth year in six, and increasing the net selldown which has occurred since the monster year in 2013. </p><section class="figure"><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/956/original/Screenshot%202020-11-29%20at%203.07.23%20PM.png?1606633655" class="editor-image img-responsive" data-smartkarma-image-id="174956"></figure></section><p>This data is compiled from the weekly data which shows each investor category. On a net basis across all investor categories, it will be flat because while it shows buybacks on market, crediting the "Business Corporations" category, it does not show the data of investors selling into Tender Offers or the data of investors buying from IPOs.</p></section><p>Of course, the data is not that clean because investing doesn't always happen according to calendar year decisions. </p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/969/original/Screenshot%202020-11-29%20at%203.40.57%20PM.png?1606635676" class="editor-image img-responsive" data-smartkarma-image-id="174969"></figure></section><p>It just so happens that the last two really big selloffs in dollar terms (both exceeding ¥6trln on a rolling 52wk basis) did not happen to see start and end points coincide with those of the Gregorian calendar.</p>
<p>There has been an interesting confluence of "lack of participation in the market" this year. After lifting ETF buys in March 2020, the BOJ has slowed down its ETF buying considerably in the past six months (the current 6-month total is near the lower end of the range seen in the past four years), buybacks are down this year as companies slowed their activity in the face of covid-19-induced uncertainty, and foreigners are net sellers. </p>
<p>Of course Japanese insurers are on the verge of extending what will be a 12-year streak of net sells to a 13th year, and it looks like Japanese banks will be extending their net selling to a 14th year in a row. Trust Banks will be net buyers for the sixth year in seven this year, but for at least the fourth year in a row it will be less than the net buying of ETFs by the BOJ so ex-BOJ trust banks will have been net sellers for several years. </p>
<p>Business corporations are up ¥1.335trln year-to-date through the 20th of November, and will almost certainly extend their streak to ten years on the buy side. The interesting net flow this year is the "Proprietary" flow at brokers. This is now positive for ten years in a row, and there are particular reasons for this, as discussed below.</p>
<p>Because of the noise around recent articles about the BOJ and foreign activity, I decided to once again dust off the long-term analytics on Japan investor class flows, and present them here. Because flows net off to close to zero (i.e. there are a certain number of shares, and if some investor class is a net seller, other investor classes must be net buyer(s)), deriving a model for behavior is useful.  Long ago, in roles in fixed income and equity derivatives strategy, I built models of net foreign buying, and they uniformly showed that foreign investors chase/push/drive performance. My final model is a multi-input model which provides a simple combination of two factors they chase.</p>
<p>This insight discusses those behavior models, investor class flow dynamics, cycles, and trends and pressures near-term.</p>
<p>The combination of the investor class flows, and the model which drives net foreign activity, is interesting. I think it helps because the top-down aspect matters for understanding allocation flow.</p>
<p>Read on for the nitty gritty (as usual, we start with Conclusions First).</p></section>

Long-time Japan strategist Jonathan Allum, most recently of SMBC Nikko, put a guest post titled Takeaways from 30 years of Covering the Japanese Market in the Financial Times on 26 November (Thanksgiving) which is well worth a read.He points out that foreign investors in 2020 are likely going to be net dis-investors in Japan for the fourth year in five, fifth year in six, and increasing the net selldown which has occurred since the monster year in 2013. This data is compiled from the weekly data which shows each investor category. On a net basis across all investor categories, it will be flat because while it shows buybacks on market, crediting the "Business Corporations" category, it does not show the data of investors selling into Tender Offers or the data of investors buying from IPOs.Of course, the data is not that clean because investing doesn't always happen according to calendar year decisions. 
It just so happens that the last two really big selloffs in dollar terms (both exceeding ¥6trln on a rolling 52wk basis) did not happen to see start and end points coincide with those of the Gregorian calendar.
There has been an interesting confluence of "lack of participation in the market" this year. After lifting ETF buys in March 2020, the BOJ has slowed down its ETF buying considerably in the past six months (the current 6-month total is near the lower end of the range seen in the past four years), buybacks are down this year as companies slowed their activity in the face of covid-19-induced uncertainty, and foreigners are net sellers. 
Of course Japanese insurers are on the verge of extending what will be a 12-year streak of net sells to a 13th year, and it looks like Japanese banks will be extending their net selling to a 14th year in a row. Trust Banks will be net buyers for the sixth year in seven this year, but for at least the fourth year in a row it will be less than the net buying of ETFs by the BOJ so ex-BOJ trust banks will have been net sellers for several years. 
Business corporations are up ¥1.335trln year-to-date through the 20th of November, and will almost certainly extend their streak to ten years on the buy side. The interesting net flow this year is the "Proprietary" flow at brokers. This is now positive for ten years in a row, and there are particular reasons for this, as discussed below.
Because of the noise around recent articles about the BOJ and foreign activity, I decided to once again dust off the long-term analytics on Japan investor class flows, and present them here. Because flows net off to close to zero (i.e. there are a certain number of shares, and if some investor class is a net seller, other investor classes must be net buyer(s)), deriving a model for behavior is useful.  Long ago, in roles in fixed income and equity derivatives strategy, I built models of net foreign buying, and they uniformly showed that foreign investors chase/push/drive performance. My final model is a multi-input model which provides a simple combination of two factors they chase.
This insight discusses those behavior models, investor class flow dynamics, cycles, and trends and pressures near-term.
The combination of the investor class flows, and the model which drives net foreign activity, is interesting. I think it helps because the top-down aspect matters for understanding allocation flow.
Read on for the nitty gritty (as usual, we start with Conclusions First).

JAPAN FLOW:  Foreign Investor Flows Still Matter (Redux, Reduxed) - Playing Catchup

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<p>The BOJ's buying of ETFs continues but the pace has slowed in recent months. This does not mean we don't get ETF news, comments, etc. </p>
<p>BOJ Governor Kuroda was in front of parliament a week ago and talked about the BOJ's ETF-buying programmes. There are questions from former BOJ executives out in the wild about what the BOJ will do to a) stop buying, b) reduce its holdings in ETFs, etc. </p>
<p>Mr Kuroda was quite clear with his answer. From a Reuters <a href="https://www.reuters.com/article/japan-economy-kuroda-etf-idUST9N2GT02I" target="_blank" rel="noopener">note</a> last week...</p>
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<p>The BOJ already buys ETFs “quite flexibly” and can reduce purchases when the market risk premium is not rising, Kuroda told parliament.</p>
<p>“If inflation hits our 2% target and an exit from our massive stimulus programme comes into sight, there will certainly be debate on how to end our ETF buying. But it’s premature to do so at this stage.”</p>
</blockquote></div><div>The proof is in the pudding.</div><div></div><div>Historically, the pattern based on analysis of the data was that if the AM session close of the market was lower than the previous full-day close, the BOJ would be in buying in the PM session. First it was when the market was down more than 100bp. Then it was 50bp. Then 25bp, then even when it was down at all. </div><div></div><div>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/908/original/Screenshot%202020-11-25%20at%2012.09.11%20PM.png?1606277380" class="editor-image img-responsive" data-smartkarma-image-id="173908"></figure></section><p>As the chart shows, the rolling 3mo and 6mo purchase total annualises out to ¥4.5 trillion and ¥5.0 trillion, respectively.  The BOJ has substantially lowered how much it is buying, mostly because the market is well-behaved. The buying they did the few times they were involved in January and February was ¥70bn a day. When risk went bad in March, they upped it to ¥100bn, then ¥120bn, and by mid-March had lifted the annual total limit to ¥11.7trln, buying ¥200bn on many days, and effectively in April, there were only two days where the market fell in the morning session and the BOJ was not in buying. Things looked up in markets as they were looking down fundamentally and the BOJ lowered its involvement as the risk premium wasn't rising when earnings projections were falling sharply. </p>
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<p>However, I expect this lull is temporary. They are effectively building up a very large buffer so they can go in at a higher rate when necessary. With the market up 12% month-to-date, and US stocks seemingly on a tear of vaccine-related hope, and month-end globally looking very much like a sell of stocks to buy bonds from an allocator or risk-parity perspective, they may be back in before you think. </p>
<p>More discussion below the fold. </p>
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The BOJ's buying of ETFs continues but the pace has slowed in recent months. This does not mean we don't get ETF news, comments, etc. 
BOJ Governor Kuroda was in front of parliament a week ago and talked about the BOJ's ETF-buying programmes. There are questions from former BOJ executives out in the wild about what the BOJ will do to a) stop buying, b) reduce its holdings in ETFs, etc. 
Mr Kuroda was quite clear with his answer. From a Reuters note last week...

The BOJ already buys ETFs “quite flexibly” and can reduce purchases when the market risk premium is not rising, Kuroda told parliament.
“If inflation hits our 2% target and an exit from our massive stimulus programme comes into sight, there will certainly be debate on how to end our ETF buying. But it’s premature to do so at this stage.”
The proof is in the pudding.Historically, the pattern based on analysis of the data was that if the AM session close of the market was lower than the previous full-day close, the BOJ would be in buying in the PM session. First it was when the market was down more than 100bp. Then it was 50bp. Then 25bp, then even when it was down at all. 
As the chart shows, the rolling 3mo and 6mo purchase total annualises out to ¥4.5 trillion and ¥5.0 trillion, respectively.  The BOJ has substantially lowered how much it is buying, mostly because the market is well-behaved. The buying they did the few times they were involved in January and February was ¥70bn a day. When risk went bad in March, they upped it to ¥100bn, then ¥120bn, and by mid-March had lifted the annual total limit to ¥11.7trln, buying ¥200bn on many days, and effectively in April, there were only two days where the market fell in the morning session and the BOJ was not in buying. Things looked up in markets as they were looking down fundamentally and the BOJ lowered its involvement as the risk premium wasn't rising when earnings projections were falling sharply. 

However, I expect this lull is temporary. They are effectively building up a very large buffer so they can go in at a higher rate when necessary. With the market up 12% month-to-date, and US stocks seemingly on a tear of vaccine-related hope, and month-end globally looking very much like a sell of stocks to buy bonds from an allocator or risk-parity perspective, they may be back in before you think. 
More discussion below the fold. 



JAPAN FLOW:  BOJ ETF Exit Fretting Is A Thing But Shouldn't Be. BOJ Buys Slower But Still Bigly

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Thematic (Sector/Industry)

<p><a href="https://asia.nikkei.com/Business/Energy/Japan-taps-Australia-and-Brunei-for-hydrogen-import-goal" target="_blank" rel="noopener">Momentum is building within East Asia to propel the Hydrogen economy forward</a> as Japan, Korea and China have demonstrated interest in investing heavily in the technology, a call that is being answered by a variety of players through the supply chain. We examine below the key investment opportunities and timelines for these players.</p>

Momentum is building within East Asia to propel the Hydrogen economy forward as Japan, Korea and China have demonstrated interest in investing heavily in the technology, a call that is being answered by a variety of players through the supply chain. We examine below the key investment opportunities and timelines for these players.

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

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<div>During COVID-19, tech stocks have led the markets supported by demand expansion, strong balance sheets filled with cash, and innovative products. At the end of the cycle, there should be a rotation towards cyclical and value stocks but this time around is policy-induced recovery and during the COVID-19 crisis, tech stocks have led the recovery ahead of the cyclical. The question is whether this will carry on and large tech names to continue leading market recovery while cyclical drag their feet?</div>
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<div>The regulator in China has given dominant tech names a slap in the wrist with the anti-trust law that proposes to democratize the payment systems that will inevitably break up the monopolies and these companies will lose their customers' stickiness. </div>
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<div>In light of the <strong>antitrust</strong> law and the real economic recovery in China, investors should start to underweight technology stocks in China such as Tencent, Alibaba, Meituan, and start to overweight travel and tourism stocks such as <a href="https://www.smartkarma.com/entities/air-china-ltd-a" target="_blank" data-smartkarma-citation="entities:1080:1" rel="noopener">Air China Ltd (A) (601111 CH)</a> , <a href="https://www.smartkarma.com/entities/travelsky-technology-ltd-h" target="_blank" data-smartkarma-citation="entities:19829:1" rel="noopener">Travelsky Technology Ltd H (696 HK)</a> , <a href="https://www.smartkarma.com/entities/cathay-pacific-airways-ltd" target="_blank" data-smartkarma-citation="entities:243:1" rel="noopener">Cathay Pacific Airways (293 HK)</a> and also Industrials such as <a href="https://www.smartkarma.com/entities/zoomlion-heavy-industry-h" target="_blank" data-smartkarma-citation="entities:7817:1" rel="noopener">Zoomlion Heavy Industry H (1157 HK)</a> and <a href="https://www.smartkarma.com/entities/sany-heavy-equipment-intl" target="_blank" data-smartkarma-citation="entities:11104:1" rel="noopener">Sany Heavy Equipment Intl (631 HK)</a>expecting that construction works can resume at full capacity anytime soon. </div>
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<div>Globally, dominant tech stocks (FANGS) such as <a href="https://www.smartkarma.com/entities/facebook-inc-a" target="_blank" data-smartkarma-citation="entities:665:1" rel="noopener">Facebook Inc A (FB US)</a> , <a href="https://www.smartkarma.com/entities/apple-inc" target="_blank" data-smartkarma-citation="entities:666:1" rel="noopener">Apple Inc (AAPL US)</a> , <a href="https://www.smartkarma.com/entities/netflix-inc" target="_blank" data-smartkarma-citation="entities:20451:1" rel="noopener">Netflix Inc (NFLX US)</a> and <a href="https://www.smartkarma.com/entities/alphabet-inc-cl-c" target="_blank" data-smartkarma-citation="entities:11369:1" rel="noopener">Alphabet Inc Cl C (GOOG US)</a> should start to be underweight due to the potential punitive measures from the House if Democrats win. Investors should start to overweight industrial stocks such as <a href="https://www.smartkarma.com/entities/caterpillar-inc" target="_blank" data-smartkarma-citation="entities:697:1" rel="noopener">Caterpillar Inc (CAT US)</a> and staples such as <a href="https://www.smartkarma.com/entities/procter-gamble-co" target="_blank" data-smartkarma-citation="entities:978:1" rel="noopener">Procter &amp; Gamble Co (PG US)</a> and <a href="https://www.smartkarma.com/entities/nestle-sa-020546b9-e58a-465b-a5ac-98e84143bf4c" target="_blank" data-smartkarma-citation="entities:27908:1" rel="noopener">Nestle SA (NESN SW)</a> . </div>
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<div>Investors should also consider start building positions in blue-chip with moat names such as <a href="https://www.smartkarma.com/entities/visa-inc-class-a-shares" target="_blank" data-smartkarma-citation="entities:8707:1" rel="noopener">Visa Inc Class A Shares (V US)</a> and <a href="https://www.smartkarma.com/entities/travelers-cos-inc" target="_blank" data-smartkarma-citation="entities:10300:1" rel="noopener">Travelers Cos (TRV US)</a> as they provide stability and proxy to America's economic recovery. </div>


During COVID-19, tech stocks have led the markets supported by demand expansion, strong balance sheets filled with cash, and innovative products. At the end of the cycle, there should be a rotation towards cyclical and value stocks but this time around is policy-induced recovery and during the COVID-19 crisis, tech stocks have led the recovery ahead of the cyclical. The question is whether this will carry on and large tech names to continue leading market recovery while cyclical drag their feet?


The regulator in China has given dominant tech names a slap in the wrist with the anti-trust law that proposes to democratize the payment systems that will inevitably break up the monopolies and these companies will lose their customers' stickiness. 



In light of the antitrust law and the real economic recovery in China, investors should start to underweight technology stocks in China such as Tencent, Alibaba, Meituan, and start to overweight travel and tourism stocks such as Air China Ltd (A) (601111 CH) , Travelsky Technology Ltd H (696 HK) , Cathay Pacific Airways (293 HK) and also Industrials such as Zoomlion Heavy Industry H (1157 HK) and Sany Heavy Equipment Intl (631 HK)expecting that construction works can resume at full capacity anytime soon. 

Globally, dominant tech stocks (FANGS) such as Facebook Inc A (FB US) , Apple Inc (AAPL US) , Netflix Inc (NFLX US) and Alphabet Inc Cl C (GOOG US) should start to be underweight due to the potential punitive measures from the House if Democrats win. Investors should start to overweight industrial stocks such as Caterpillar Inc (CAT US) and staples such as Procter &amp; Gamble Co (PG US) and Nestle SA (NESN SW) . 

Investors should also consider start building positions in blue-chip with moat names such as Visa Inc Class A Shares (V US) and Travelers Cos (TRV US) as they provide stability and proxy to America's economic recovery. 

Japan

Toyota Motor Corporation manufactures, sells, leases, and repairs passenger cars, trucks, buses, and their related parts worldwide. The Company also operates financing services through their subsidiaries. Toyota Motor builds homes, produces pleasure boats, and develops intelligent transportation systems including radar cruise control and electronic toll collection systems.

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Toyota Motor (7203 JP)

StubWorld: Toyota Industries Unjustified Outperformance Vs. Toyota Motors

If you are in the Stub, unwind it here (sell 6201 buy back 7203). If you are not in the Stub/Holdco Trade, put it on in reverse. At least, it...

David Blennerhassett

JAPAN FLOW: Foreign Investor Flows Still Matter (Redux, Reduxed) - Playing Catchup

The Japanese market has unusual flow cyclicality. Foreigners take price. They have been net sellers. They buy when USD-denom TOPIX outperforms....

Travis Lundy

JAPAN FLOW: BOJ ETF Exit Fretting Is A Thing But Shouldn't Be. BOJ Buys Slower But Still Bigly

The BOJ is still buying, and Kuroda-san says it will continue, despite a new wave of questions about the policy, and eventual exiting. Exit is...

Travis Lundy

Asia’s Hydrogen Economy

China's increasing favour towards hydrogen is starting to generate investor interest in potential hydrogen economy and FCV plays. We examine...

Mio Kato

Tech Sell-Off: Stop or Carry On?

In light of the anti-trust law in China, real economic recovery, higher corporate tax rates in the US, and breakup of dominant tech firms,...

Henry Soediarko

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