Topix Seen Rising 17% as Japan Strategists Stay Bullish in Slump

  • Six of 11 respondents in Bloomberg survey maintain forecasts
  • Benchmark stock index has fallen 16 percent from August peak

Unruffled by a plunge in Japanese shares, most strategists are sticking to their guns.

Six of 11 respondents in a Bloomberg survey this month kept the same year-end forecasts for the Topix index as they gave in August, despite a 16 percent drop in the benchmark equity gauge from Aug. 10 through Thursday. One raised the target, while the remaining four lowered theirs. The average prediction was for a 17 percent advance by year-end from Thursday’s close.
 
After rising for much of the year, Japanese shares were derailed by a global stock rout since China’s shock devaluation of the yuan last month. Strategists from Citigroup Inc. to Mizuho Securities Co. say this is a passing trend, citing confidence in corporate earnings and expectations for additional easing by the Bank of Japan.
 
“I’m 70 percent positive on Japan,” said Naoki Iizuka, chief Japan equity strategist at Citigroup in Tokyo, who maintained his year-end target of 1,750 for the Topix in the latest survey. “I’m getting more and more convinced that there’ll be further easing.”
 
Earnings per share for companies in the Topix are projected to rise 9.8 percent in the next 12 months, according to analyst estimates compiled by Bloomberg. Mizuho Securities projects a 17 percent gain in operating profits in the fiscal year ending March.

No Crisis

"I don’t expect the whole world to plunge into crisis," said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. "If you stick to looking at earnings, current share prices are sufficiently cheap."

Valuations on the Topix sank to the lowest since October earlier this month. The gauge traded at 13.5 times estimated profit at Thursday’s close, compared with 16.4 for the Standard & Poor’s 500 Index on Wednesday. The Topix rose 1.9 percent on Friday.

Topix vs S&P 500 -- Price to Estimated Earnings
Topix vs S&P 500 -- Price to Estimated Earnings

 
“Valuations are cheaper,” strategists including Ryota Sakagami at SMBC Nikko Securities Inc. wrote in a report this month. "If we see repeated cuts to earnings forecasts, current share prices may be justified, but we think the risk of big downward revisions is small," they wrote.

Citigroup’s Iizuka says he’s counting on further easing from Japan’s central bank before the end of the year. He’s not alone in his prediction: 13 of 35 economists surveyed by Bloomberg Sept. 7-10 predict the BOJ will add to record stimulus by year-end.

Analysts led by Masatoshi Kikuchi at Mizuho Securities, the only company in the survey to raise its target since last month, say they expect global economic sentiment to start recovering by the end of the year.
 
Some analysts are curbing their enthusiasm. Soichiro Monji, chief strategist at Tokyo-based Daiwa SB Investments Ltd., lowered his forecast for the Topix to 1,850 from 2,050, citing concerns about a worldwide economic slowdown. His revised target is still 30 percent higher than the measure’s last close.
 
“Global growth including Japan will probably be a little less than we initially estimated,” said Monji. “Developing economies as a whole will probably be weaker as well as China.”

Average Projection

Yet the majority of strategists remain bullish. The Topix will rise to 1,669 by the end of the year, according to their average projection, compared with its Thursday close of 1,426.97.

"If we manage to avoid the worst-case scenario, a hard landing in China, I expect both the Japanese and U.S. economies to continue to recover," said Tatsushi Maeno, head of Japanese equities at Pinebridge Investments Japan Co. in Tokyo. "Japanese stocks should keep pricing that in."

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