Tokyo Market Outlook：AI and semiconductor stocks face selling pressure, contrarian opportunity may emerge

The Tokyo stock market saw the Nikkei Stock Average plunge 2,563.00 points to 64,024.60 on Monday, marking a third consecutive session of decline amid panic selling, with losses exceeding 3,100.00 points at one point. The index had reached a record high of 68,402.00 on June 3, bringing it within striking distance of the 70,000.00 mark. However, that peak proved to be a near-term ceiling as the volatile market shifted into a downward trend. While the not-a-bubble argument has recently gained traction?suggesting that the AI-led surge was not accompanied by overvaluation based on traditional metrics like price-to-earnings (PER) ratios?the market's contrarian nature was on full display as overall market capitalization shrank. Nevertheless, this could represent an opportunity for standby funds.

With the major special quotation (SQ) calculation scheduled for Friday, June 12, futures-led selling could emerge, prompting caution. However, arbitrage buying has not accumulated significantly during the recent rally, and the SQ impact is unlikely to be substantial, according to a strategist at a mid-tier securities firm. Other market participants suggest that incentives for manipulation are thin due to the absence of large put positions in options. The key factor will be the intensity of the headwinds blowing against individual AI stocks. South Korea's stock market triggered a circuit breaker in the morning session and fell more than 8.00%. A market analyst at an online brokerage noted a strong possibility that margin calls will occur intensively on Tuesday in Korea, with the impact likely to spill over to the Tokyo market. However, if such an impact materializes, it could conversely mark a near-term reversal point.

One approach is to capture a rebound in AI and semiconductor shares that have plunged sharply. Given that some issues involve margin calls, there is a risk of another round of mechanical selling. Therefore, a strategy of gradually buying on dips without overextending would involve starting from Monday's volatile decline and accumulating positions. If a recovery occurs early Tuesday, investors could exit temporarily or hold for the medium term. For day traders, entering at Monday's opening and selling at the moment of a bounce was an option, though this depends entirely on reflexes and resembles gaming rather than a rational investment approach. Regarding individual stocks, performance will likely be similar across the board for regular constituents of the top market capitalization rankings. Generally, shares with larger declines tend to have stronger price elasticity, but from a technical perspective, stocks that have maintained a clear upward trend with many candlesticks and shallow pullbacks until recently offer more reassurance. For example, the deep pullback in Kioxia Holdings <285A> could be cited as a prime target, though it requires substantial capital. For Kioxia Holdings, buying into the morning sell imbalance would have allowed for a turnaround within 20 minutes in hindsight.

Another approach involves shares that were left out of the recent AI rally and have undergone sufficient adjustments. Intellectual property (IP)-related stocks such as Nintendo Co., Ltd. <7974> fit this pattern and tend to demonstrate downside resistance. Nintendo shares showed a golden cross between their 5-day and 25-day moving averages in the lower range and closed slightly higher on Monday. Meanwhile, TOHO CO., LTD. <9602>, another IP-related stock, broke away from its bottom on Monday, stimulated by a buy recommendation from a foreign brokerage, which also provided buoyancy to Nintendo shares.

Investment funds are now turning their attention to HALO stocks, which sit at the opposite end of the spectrum from AI and semiconductor shares. HALO is an acronym for "Heavy Asset Low Obsolescence," referring to equities that possess substantial assets and low obsolescence risk, under the concept that they hold economic value that cannot be replicated by AI. Specific sectors include lifelines such as electricity, gas, and water, alongside telecommunications infrastructure and railways. Defense contractors responsible for national security and companies providing infrastructure materials like steel and cement also fall into this category. Examples include electric power companies such as Tokyo Electric Power Company Holdings, Incorporated <9501> and The Kansai Electric Power Company, Incorporated <9503>; gas utilities such as TOKYO GAS CO.,LTD. <9531> and OSAKA GAS CO.,LTD. <9532>; major telecommunications carriers such as NTT, Inc. <9432>, KDDI CORPORATION <9433>, and SoftBank Corp. <9434>; Ministry of Defense contractor Mitsubishi Heavy Industries,Ltd. <7011>; and steelmaker NIPPON STEEL CORPORATION <5401>.

According to market participants, while this is distinct from a capital shift out of AI and semiconductor shares, there is a view that AI-focused portfolios could become extremely unbalanced depending on future circumstances. Consequently, interest in old-economy companies unrelated to the AI economic sphere is gradually forming a broader trend as a hedge, an analyst at an online brokerage noted. Recognition appears to be spreading that it is necessary to cover HALO stocks to balance portfolios, overlapping with the pattern of a return reversal.

On Tuesday's schedule, May money stock data will be released before the market opens, and a six-month Treasury bill auction will be held during the morning session. Market attention is also high on the preliminary May machine tool orders announced after 3:00 p.m. Overseas, China's May trade statistics will be released, while in Europe, Germany's June ZEW economic sentiment index will be announced, and the Polish Monetary Policy Council will convene through June 10. In the United States, focus will be on the April trade balance, April wholesale inventories and sales, the May NFIB small business optimism index, and May existing home sales, alongside a scheduled 3-year U.S. Treasury auction.

Source: MINKABU PRESS

*Translated by generative AI. Click here for the original article.