SocGen: Go long Japan autos and short electrical appliances

Plastic sushi keychains at Japan-based DaisoPlastic sushi keychains at Japan-based Daiso

Societe Generale said it’s sticking with a long Japan autos and short electrical appliances play, pointing to diverging valuations.

“We like value in Japan and the automobile sector is one of the most attractively valued at the moment,” the bank said in a note on Wednesday, pointing to “extremely bearish” positioning in the sector.

“The sector is one of the most disliked by domestic investors (along with financials and utilities). The amount of net underweight was only ever (significantly) higher on one occasion, back in 2008/2009,” it said.

SocGen pointed to the correlation the Japan auto sector has with yen fluctuations, as it tends to outperform as the yen weakens, making the shares posed to benefit if the Japanese currency extends its recent slide.

It said a combination of factors — the timetable for earnings kickoff by Honda, Mazda and Denso on April 27, the “very low valuation” both historically and relative to other sectors and expectations that the stronger yen impact has already been priced in to shares — meant it woudn’t take much for the sector’s shares to recover from here.

But on the downside, SocGen said it was staying short the TOPIX electrical machinery sectors, even though it was also correlated with the yen, as some names in the sector were likely to take a hit from the escalating China-U.S. trade tensions.

“With both valuation and sentiment at a five-year high, the sector is becoming increasingly vulnerable to earnings disappointments,” it said.