World’s Highest Stock Valuations Signal Japanese Recovery
Japan’s stock market, hobbled by more than a decade of deflation, is showing companies will stage a full earnings recovery from the worst nuclear crisis since Chernobyl, pricing in the biggest increase in profits compared with other countries since 2001.
Income in the Nikkei 225 Stock Average (NKY) will rise by 69 percent in 2012, after plunging 31 percent last year, according to more than 2,600 analyst estimates compiled by Bloomberg. At 24.5 times reported earnings, Japanese equities are the most expensive among the world’s 60 biggest markets, trading so high that only by meeting analysts’ forecasts will ratios come back in line with global stocks, data compiled by Bloomberg show.
“The worst is over for Japan in terms of earnings,” Masafumi Oshiden, an investment manager at ING Mutual Funds Management Co. (Japan) Ltd., said in a telephone interview on April 18. The firm oversees about 1.5 trillion yen ($18.4 billion). “Consumer spending is improving and corporate earnings are rebounding. The cautious mood following the quake is gone.”
Bulls say the valuations show confidence in a recovery that will help Japanese stocks close the gap with the MSCI All- Country World Index, which has risen almost three times as much since 2009. Bears point to combined annual losses from Sony Corp. (6758) and Sharp Corp. of 900 billion yen and an economy that has contracted three of the past four years as evidence the Nikkei 225, which has rallied 17 percent since November, has come too far, too fast.
The rate of profit growth in Japan is forecast to exceed global earnings by the most on record, with analysts projecting income in the MSCI All-Country World Excluding Japan Index will rise 10 percent this year, according to data compiled by Bloomberg. Canon Inc., Fanuc Corp. and Japan Tobacco Inc. are among 70 companies in the Nikkei 225 scheduled to post results in the next two weeks.
The Nikkei 225 fell 0.2 percent to 9,542.17 in Tokyo. The index would trade at 14.8 times earnings should analyst profit forecasts for this year materialize and stocks neither rise nor fall, according to data compiled by Bloomberg. That’s 24 percent cheaper than the six-year average for the gauge and comparable to a multiple of 12 for MSCI’s global equity index that excludes Japan’s shares.
While Japanese companies are on track to recoup losses from the record magnitude-9 earthquake in March 2011, the economy still faces a shrinking population, the world’s highest debt burden and a currency near the strongest level since World War II. The Nikkei 225 is 75 percent below the December 1989 peak reached during the nation’s housing bubble and the yen has tripled in the past 30 years.
The index is 6.8 percent below its close on March 11, 2011, even after a 13 percent rally this year, the fifth-best performance among 24 developed markets around the world. Policy makers in Tokyo have committed to 20 trillion yen in relief spending to rebuild towns and spur economic growth. Bank of Japan Governor Masaaki Shirakawa pledged during a speech in New York last week to continue adding monetary stimulus.
Japan’s economy will limit gains in stocks, according to Shane Oliver, the Sydney-based head of investment strategy at AMP Capital Investors Ltd., which oversees about $100 billion. Gross domestic product may increase 1.6 percent this year, compared with an estimated 2.3 percent global expansion, according to the median economist estimate from a Bloomberg survey. Population in the country fell by a record 0.2 percent in 2011, the government said last week.
Trailing Global Peers
“There are several drags on Japanese shares,” Oliver said in an April 19 phone interview. “One of them is ongoing deflation, which acts as a disincentive to spending and is also a huge constraint on company profits. The other is a relatively strong yen, which is actually a drag on growth and competitiveness in Japan.”
Japanese shares have trailed most major equity gauges since global markets bottomed in March 9, 2009. The Nikkei 225 is up 35 percent, compared with 89 percent for the MSCI global index and 104 percent in the Standard & Poor’s 500 Index. Strategists say the Nikkei 225 may advance 11 percent to 10,600 by the end of the year, according to the median of 15 estimates compiled by Bloomberg.
“Japanese companies have been very good at cutting costs and doing the right things in order to compete, particularly in the case when they have such a strong currency,” Martin Schulz, director of international equities at PNC Capital Advisors LLC in Cleveland, said in a telephone interview on April 20. His firm manages $35 billion. “It’ll take a long time for them to get back to the Nikkei levels they reached in the 1990s.”
Tokyo-based Sony shares slumped 26 percent since March 16 as the first decline in global TV shipments in six years and a stronger yen eroded income at Japan’s biggest electronics exporter. Gains in the currency reduce the value of overseas profits earned by Japanese companies.
The yen has weakened 8.7 percent in 2012 versus nine developed-nation peers as the Bank of Japan set an inflation goal of 1 percent and expanded asset purchases by 10 trillion yen in February. The currency is forecast to decline 3 percent to 84 per dollar by the end of the year, according to the median estimate of 75 analysts surveyed by Bloomberg.
Harris Associates LP’s Rob Taylor, who owns shares of Toyota Motor Corp., said further declines in the yen will boost profits and stock prices. Toyota’s operating income fell by 305 billion yen during the last nine months of 2011, with currency fluctuations contributing 200 billion yen to the decline, the company said on Feb. 7.
Japanese executives “have been taking a lot of costs out and trying to be able to make money in this very harsh environment,” Taylor, a fund manager at Chicago-based Harris Associates, said in a phone interview on April 17. His firm manages $74.7 billion. “Then you get the yen weakening, and then you’ll start to really see those earnings snap back.”
Asia’s biggest carmaker raised its forecast on April 5 for sales of cars and light trucks by the U.S. auto industry this year. The company’s financing unit sold 15 billion yen of five- year bonds last week with a 0.415 percent coupon, the lowest since April 2003, data compiled by Bloomberg show. Shares of the Toyota City, Japan-based company have rallied 28 percent this year.
“The Japanese market has its own engines to start rising, rather than just relying on the global economy,” Arnout Van Rijn, chief investment officer for Robeco Groep NV’s Hong Kong division, said in a Bloomberg Television interview on April 18. The firm oversees $200 billion globally. “It’s after a very long bear market and it doesn’t take much for this market to really start moving up.”
Bloomberg moderates all comments. Comments that are abusive or off-topic will not be posted to the site. Excessively long comments may be moderated as well. Bloomberg cannot facilitate requests to remove comments or explain individual moderation decisions.