(Bloomberg) -- Japan’s stock-market rally has more to go, and the Topix index might reach a peak by mid next year, some strategists and fund managers say.
Nomura Securities sees the benchmark gauge rallying as much as 19% to 2,075, buoyed by pick up in corporate earnings. Jefferies and Goldman Sachs Japan are among those that expect a recovering global economy will help boost the shares.
While the outlooks are mostly positive, market watchers project the rally will lose steam as the year progresses. Nomura strategist Yunosuke Ikeda says the U.S. presidential election is an “important” risk factor that may impact assets after mid-2020. Okasan Securities’ chief strategist, Fumio Matsumoto, sees a long-term economic cycle peaking after the summer, before a correction hits Japan’s equities between 2021 and 2023.
2019 was a year of two tales for Japanese shares. The market was one of the worst performers of the developed world in the first eight months as its exporters suffered from the U.S.-China trade war. But starting in September, optimism over the two countries’ negotiations helped boost the Topix, sending it to its highest level since October 2018. Tech shares led the gains this year, while energy producers fell the most.
With a valuation of 14 times estimated earnings, the Topix is now slightly above its five-year average of 13.6 times, data compiled by Bloomberg show.
Nomura (strategists including Yunosuke Ikeda)
- Sees the global economy recovering and corporate earnings picking up, with the Topix reaching 2,075 and the Nikkei 225 climbing to 28,000 by June
- Japanese value stocks are likely to outperform growth shares through 2020 amid the recovery
- Investors should focus on exporters and cyclicals; top picks include machinery, electric-appliance and precision-instrument sectors
Morgan Stanley (strategists including Michael Wilson and Jonathan Garner)
- Maintains overweight stance on Japan
- Earnings forecasts suggest 6% growth for Topix in 2020
- Top trades include going long Japan and South Korea equities
- “Japan has better valuations and risk premium than developed-market peers”
- Continuing focus on buyback and corporate governance will boost some stocks
- Has overweight on Topix IT and services sector, financials excluding banks, wholesale trade and construction; underweight on food, retail, pharmaceutical and automakers
Goldman Sachs (strategists including Kathy Matsui)
- Sees the Topix reaching 1,800 by end-2020 and the Nikkei 225 climbing to 25,000
- Risk-reward seems favorable as almost half of TSE first-section companies still trade below book value
- “We see potential buying from corporates, the BOJ and foreigners”
- Expects an 8% rebound in EPS forecasts for FY 2020 and 6% growth in FY 2021
- Downside risks for the market include the amended foreign-investment rule being more adverse than expected
Jefferies (strategists including Sean Darby)
- Upgrades Japan to bullish from modestly bullish and sees the Topix advancing to 2,000
- Evidence that “some of the worst of the data points is almost behind us”
- Japanese economy is unlikely to grow dramatically next year, but companies are “geared to an upswing in global growth”
- Top picks include Fancl, SMC, Hitachi High-Technologies, Suzuki Motor, Idemitsu Kosan, Persol, HIS, Square Enix, Pan Pacific International, Shin-Etsu Chemical, Taiyo Nippon Sanso
Amundi Asset Management
- Rates Japan equities neutral; earnings growth has delivered less than in the rest of the world since 2016, and it may be the case again next year
- Investors should expect a possible bottoming out in earnings growth and be ready to increase exposure to “contrarian markets and sectors” in the coming months, including those in Japan
- “Japan can benefit from a shift to value. It remains also under the influence of the yen and is sensitive to geopolitical risks”
Okasan Securities (strategists including Fumio Matsumoto)
- Japanese stocks will reach a peak between January and March as concerns about U.S.-China trade alleviate and the short-term economic cycle heads for growth; cyclicals look attractive
- Key scheduled events in next few years include market restructuring at Tokyo Stock Exchange, Prime Minister Shinzo Abe’s term ending in September 2021, BOJ Governor Haruhiko Kuroda’s term ending in March 2023
- If the TSE reform involves switching to a new Topix index, stocks with low turnover will get sold off
- The conclusion of Kuroda’s term could lead to a possible cut to the BOJ’s ETF purchases, or an end to the program altogether
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