Japan’s biggest stock rally in a quarter century has been fueled by earnings growth that is three times faster than the world average, not just speculation Prime Minister Shinzo Abe will end two decades of deflation.
Profits for the Topix index will climb 57 percent to 74.78 yen a share in 2013, compared with the global average of 19 percent, according to more than 5,000 analyst forecasts compiled by Bloomberg. While gains are being aided by everything from overseas acquisitions to the weakening yen and depressed results last year, rising profits will add to economic growth.
Improving earnings and speculation Abe will succeed in spurring inflation are underpinning a rally that lured overseas investors and spurred record trading by individuals before $400 billion was erased from share values in the last two weeks. Jesper Koll, the JPMorgan Chase & Co. head of Japan equity research who had the most bullish target for the Topix last September, says profit growth will drive the gauge up another 60 percent in two years.
“These growth strategies by individual companies are going to lead to very, very positive earnings momentum,” Koll said in an interview from Tokyo on May 29. “We are waiting for Abe’s growth strategy for the country, but companies basically began this process 2 1/2 years ago.”
Toyota Motor Corp. (7203), the world’s largest carmaker, said May 8 that profit and sales will climb to the highest level in six years in the 12 months ending March 2014. The shares have almost doubled since Nov. 14. Nomura Holdings Inc., the country’s No. 1 brokerage and the best-performing stock among the Topix’s 30-biggest (8604) companies, rose 4.1 percent on April 30 after posting profits that more than tripled to the highest in seven years.
As much as $1.24 trillion was added to the value of Tokyo-traded shares since Nov. 14, when elections that brought Abe to power were announced. The Topix’s 52 percent rally since then lifted all 33 industry groups and 1,656 of its 1,709 companies, data compiled by Bloomberg show. Among markets in 72 countries tracked by MSCI’s benchmark global indexes, the seven-month advance in Japan is the biggest.
Concern Chinese manufacturing growth is slowing and signs the U.S. Federal Reserve will consider curbing bond purchases should the economy improve have spurred the biggest Topix price swings since the 2011 earthquake. Shares traded in an average range of about 3.8 percent a day since May 23, when the gauge lost 6.9 percent.
Topix shares, which touched a 29-year low one year ago this week, entered a so-called correction on May 30, having dropped more than 10 percent from a five-year high on May 22. The gauge fell 3.4 percent yesterday, extending the loss to 14 percent. The Topix rose 2.6 percent, the most in almost a month, to 1,125.47 at close in Tokyo today.
“It’s natural that stocks will move randomly,” Abe adviser Koichi Hamada told reporters in Tokyo on May 30. “Excessive upward or downward moves can happen any time.”
Profits for Japanese companies are expanding faster than the rest of the world for a second year. The 57 percent estimated growth rate comes after a 74 percent expansion in 2012, when earnings in the MSCI All-Country World Index posted a 3.1 percent contraction, data compiled by Bloomberg show.
While Topix earnings declined for more than a year through September 2012, they bounced back in the fourth quarter, increasing fourfold. It was the second-best quarterly expansion since at least 2004, data compiled by Bloomberg show. Analysts project earnings will more than double again next quarter.
They boosted 2013 income projections 10 percent last month, compared with a 2.5 percent increase for the MSCI index, according to data compiled by Bloomberg. The increase has left the index trading for 14.67 times projected income, about 14 percent cheaper than the average since the start of 2010.
“There has been an ongoing structural change among companies but a lot of that was underappreciated,” Adrian Hickey, who helps oversee $421 billion at Pictet Asset Management in London, said in a telephone interview on May 30. Abe’s stimulus plans “unlocked the value that was there,” he said. “The change of policy was the catalyst for that value to be realized.”
Abe’s stimulus follows the biggest year for Japanese takeovers on record. Softbank Corp. led companies announcing 858 overseas acquisitions worth more than $120 billion in 2012, data compiled by Bloomberg show. The third-largest wireless carrier agreed in October to buy a 70 percent stake in Sprint Nextel Corp. for $20.1 billion amid a shrinking local market.
Profit margins from the international operations of Japanese companies are almost twice those at home, according to government data. Earnings represent about 5.9 percent of sales overseas compared with 3.3 percent domestically, the Ministry of Economy, Trade and Industry said in April.
Those returns are being amplified by a more than 20 percent decline in the yen since Abe’s arrival in November. A weaker yen makes earnings from overseas more valuable when repatriated.
Toshiba Corp. (6502), the biggest flash-memory maker after Samsung Electronics Co., has used acquisitions to bolster the company’s smart-energy and chipmaking operations, leading to two years of profitability after a record loss in the year ended March 2009.
The Tokyo-based company, which supplies chips to Apple Inc., bought San Antonio-based energy-technology management company Consert Inc. for more than 1 billion yen ($10 million) in February and Swiss electronic-metering company Landis+Gyr AG in 2011 to boost energy-management sales.
Dentsu Inc., the 111-year-old Japanese advertising company, reported May 14 that earnings for the year ended March 31 increased 23 percent. The Tokyo-based firm completed a 3.16 billion-pound ($4.8 billion) takeover of Aegis Group Plc on March 27, its fourth acquisition announced last year, as it expands globally and seeks to meet its target to boost operating profit to 70 billion yen next year.
While Japanese earnings are rising, the rate of increase is being helped by comparisons to depressed year-ago periods. In 2012, Japanese companies were in the early stages of a recovery after being battered by the March 2011 earthquake disaster, floods in Thailand that disrupted supply chains and the yen trading close to its highest levels since World War II.
Profit per share retreated for five straight quarters through the end of September last year, according to data compiled by Bloomberg. Trailing 12-month earnings for the Topix totaled 51.47 yen last week, 14 percent below the level on the day of the 2011 earthquake.
“The equity market rally has not been driven by a belief that corporate earnings will recover, but simply by the recycling of QE proceeds into equities,” Guy Stephens, who helps oversee $1.1 billion as chief investment officer at RD Signature in Bristol, England, said in e-mailed comments on May 30. “Early indications are of an improvement but this is purely driven by currency at this stage.”
Gains in earnings and central bank easing may not be enough to protect stocks from their fate during every surge since 1989, when Japan’s asset bubble burst. Each of the three times since then that the Topix has advanced more than 40 percent, it later slipped to a fresh low.
“If the market is going to be supported just from monetary stimulus, then we may peak out around here,” Ayako Sera, a strategist at Sumitomo Mitsui Trust Bank Ltd., which has the equivalent of $325 billion in assets, said in a telephone interview on May 30.
Investors plunged into Japanese shares as Abe’s government passed a 13.1 trillion yen ($130 billion) supplementary budget to pay for his so-called “three arrows” policy of monetary easing, government spending on reconstruction and infrastructure, and tax relief. The Bank of Japan, led by Haruhiko Kuroda, said April 4 that it will double the country’s monetary base by the end of 2014.
A global poll by Bloomberg released May 17 showed investors are more confident in a Japanese leader than any time since at least September 2010, with optimism about Abe’s policies exceeding that for counterparts in the U.S. and Europe. The government said last week that gross domestic product rose 3.5 percent at an annualized pace, the most in a year, propelled by consumer spending and export gains.
Japan’s industrial production rose 1.7 percent in April from March, exceeding the highest estimate in a Bloomberg News survey and quickening from 0.9 percent the previous month, according to Trade Ministry data released May 31. National consumer prices fell for a sixth month in April, separate data showed. At the same time, a price gauge for the city of Tokyo rose in May for the first time in four years, a gain that may point to a shift in the next national reading, according to SMBC Nikko Securities Inc.
“I don’t think the bull run in Japan is over,” Ng Soo Nam, Singapore-based chief investment officer at Nikko Asset Management Asia Ltd., whose Japan-based parent oversees about $165 billion, said on May 30. “Abenomics will help ensure stronger economic growth. There’s this new determination from the government to fix the deflation problem. That should help encourage increased investments from companies.”
Overseas investors bought and sold a record 23.4 trillion yen worth of Japanese shares in the week ended May 24, according to Tokyo Stock Exchange data. Average daily trading volume on the Topix index, Japan’s broadest stocks measure, surged to 3.9 billion shares since the end of December, compared with about 1.9 billion a year earlier, according to data compiled by Bloomberg. Turnover has averaged 2.7 trillion yen this year.
Individual investors’ share of weekly stock trading rose to 35 percent in the week ended May 17, the highest ever, according to Tokyo Stock Exchange data going back to May 2007. That’s almost three times a record low of 12.5 percent struck in July.
Data from Kabu.com, an internet brokerage used by individual investors, shows that while the number of accounts has grown by about 5 percent since November, commissions from stock trading have quadrupled and those from the buying and selling of options and futures contracts have more than doubled.
“After this correction, I am still bullish, have not changed my Topix target of 1400 over the next 12 months, not changed my medium- and longer-term forecast,” said Kathy Matsui, Goldman Sachs Group Inc.’s chief Japan strategist, on May 30. “I have Topix EPS basically doubling between March 2013 and March 2016.”
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