Sidekick Money · Market Pulse: Japan - rising sun or false dawn, the hunt for lithium, and chip wars

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Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

In this week's edition we have:

Japan: Rising Sun or False Dawn
Lithium: The hunt is on
Chip Wars: China makes a move

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

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1) Japan: Rising Sun or False Dawn

Back in the late 80’s the Japanese economic miracle was in full swing and the Japanese stock market seemed unstoppable. Property prices were so high that a piece of land in central Tokyo, admittedly the Imperial Palace, was valued more than all the property in California. Golf club memberships sold for more than $3mn[1]. But times have changed.

When the bubble burst in December 1989, the economy, and the stock stock market, went into a tailspin. The stock market only started recovering again around 2012, more than 20 years later. During this period the Japanese economy faced persistent deflation and a strengthening Yen that reduced the competitiveness of Japanese companies overseas. This period is known as the lost decades in Japan.

Japan, aka the Land of the Rising Sun, has, over the last few decades, increasingly been referred to as the Land of the False Dawn. Just as things start looking up for Japanese stocks there is a headwind like a rapidly falling population or a stronger currency.

But things are looking brighter for the Japanese stock market. The Yen is weak, domestic prices are rising and economic growth is above expectations. As a result the stock market is trading at a 33 year high. Even Warren Buffett is getting involved. Japan is now his biggest equity allocation outside of the US [2].

There could be another reason for the strong performance of Japanese stocks. Given the tensions between the US and China, some investors are looking for an alternative way to get exposure to Chinese economic growth. One way to do this is by investing in Japan. China is Japan's largest trading partner so many Japanese companies stand to benefit from strong growth in China.

A reason to be optimistic over the longer-term is corporate governance transformation in Japan. Japanese companies are increasingly focusing on improving corporate value by focussing on their cost of capital and boosting shareholder returns. If executed well this could potentially unlock a lot of value over the long-term.

We don’t know if this is another false dawn for Japan. We do know there are some risks to keep in mind. Sure, prices and wages in Japan are rising for now but only time will tell if this is really the start of a longer-term trend. Prices tend to rise when your currency weakens and you have to import all of your energy. If the Yen gets stronger from here this trend of rising prices could reverse. Over the last few years, the Japanese currency tended to strengthen whenever the US cut their interest rates. The US could start cutting interest rates in 2024.

Let's see.

2) Lithium: The hunt is on

A few weeks back, we wrote about how the shift to a more sustainable economy could boost the long-term demand for copper. But copper is not the only metal we are going to need a lot more of over the coming decades. We’ll also need a lot of lithium, or as it is now commonly referred to, white gold.

Lithium is a key material in electric vehicle batteries. Currently each battery contains on average around 8kg of the stuff [3]. The International Energy Agency estimates the world will need between 250,000 and 450,000 tons by 2030 if we want to hit our electrification targets [4]. That is 3 times more than we are currently producing and suggests lithium production will have to grow around 15-20% per year between now and 2030.

The world has around 80-90 million tons of lithium and it is estimated we will only be able to mine a quarter of that, so global lithium reserves are around 20-30 million tons. This is enough to enable our shift to an electrified economy. But the problem isn’t so much the quantity of lithium as it is accessibility and timing.

Lithium mining, like most other mining, isn’t great for the environment. Lithium mining uses a lot of water and side effects can include biodiversity loss and soil erosion. The real challenge will be to mine enough lithium in a short period of time without leaving an environmental catastrophe in our wake, especially in developing countries like Chile, Bolivia and Argentina with vast lithium reserves.

Traditional fossil fuel companies are quickly gearing up for a future where the world needs less oil and more lithium. Exxon Mobil recently purchased a large piece of land in Arkansas believed to contain vast lithium deposits. The lithium business is nothing new to Exxon Mobil. In fact, it was an Exxon Mobil chemist that developed the lithium ion rechargeable battery back in 1976. The chemist, Stanley Whittingham, won the Nobel Prize for Chemistry in 2019 [5].

Exxon Mobil won’t be the only company interested to take part in the explosive growth expected in the lithium industry over the coming years. The race is on to deliver enough lithium to meet consumer demand for electric vehicles. We just need to make sure we’re not swapping one dirty business for another.

3) Chip Wars: China makes a move

We’ve previously written about rising tensions between the US and China and how the technological decoupling between the world's two biggest economies could be one of the biggest trends over the next decade.

Over the last few decades, Western economies have grown increasingly reliant on Asian, and especially Chinese, supply chains. For a long time this was seen as mutually beneficial but, thanks to the rapid advancement of China’s military capabilities, the status quo has changed. The US now views China’s military ambitions as a threat to global stability.

The US moved first and restricted the export of sensitive technology to China. In December last year the US added 36 companies to their export black list [6]. The US said that it took the actions to restrict China's ability to leverage artificial intelligence and advanced computing for military modernisation [7]. Soon after, US allies Japan and the Netherlands did the same. It was only ever a matter of time until China retaliated.

Last Sunday China made their move. They announced that, after a review, they found products from Micron (a US memory chipmaker) posed serious network security risks. As a result, China has banned operators of key Chinese infrastructure from buying any Micron products. This is the first big retaliatory step from China against a US semiconductor company [8].

China might be able to fill the supply gap of memory chips with products from other companies, like Samsung. Micron, on the other hand, will find it more difficult to replace a customer like China. Micron generated around 25% of its total revenues from mainland China and Hong Kong in 2022 [9].

Micron isn’t the only US tech company selling products in China though. Qualcomm for example gets more than 60% of its revenues from China [10]. Companies, both in the US and elsewhere, might question the wisdom of future investment in China. The US government, through generous subsidy schemes, is trying to entice US companies to increase domestic investment. China just made the choice facing US companies a little bit easier.

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