- Equities expected to get smaller boost from earnings and yen
- Strategists count on valuations, policies spurring rally
Brokerages are the most optimistic on Japanese stocks in three years, even as strategists pare back forecasts for two of the biggest boosts for equities under Prime Minister Shinzo Abe: earnings growth and yen weakness.
That’s why Goldman Sachs Group Inc. is betting it won’t be the yen, but rather attractive valuations, corporate governance reform and corporate tax cuts that will keep the rally going. With elections due in July, Mizuho Financial Group Inc. says the government will go all-out to make sure the progress of Abenomics is visible to anyone looking at a stock chart. The Nikkei 225 Stock Average will surge 18 percent to 22,250 by the end of 2016, the most bullish outlook since Abe returned to power in 2012, according forecasts compiled by Bloomberg.
“There’s a lot of people saying the macro economy is terrible, earnings are bad, and stocks aren’t going up, but I think they’re wrong,” said Chisato Haganuma, chief equity strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “Earnings will still grow a bit, and as long as financial conditions are positive we could see sizable gains,” he said, citing cheaper oil and robust domestic demand as the main drivers for earnings.
Abe’s bull-market rally is morphing as it enters a fourth year, with currency strategists seeing the yen’s descent leveling out and earnings growth declining for the first time since 2012. That’s set to test the resolve of investors who’ve enjoyed three straight years of gains that outpaced global equities. The Nikkei 225’s on course for an 8.4 percent increase in 2015 as the MSCI All-Country World Index falls more than 5 percent.
Goldman Sachs, whose prediction for the Nikkei 225 last year was within 0.3 percent of being right, sees the index surging 20 percent in 2016 to 22,700, the second-highest forecast among the eight brokers tallied by Bloomberg. Goldman said a recovery in consumer spending will boost earnings for cyclical stocks such as Uniqlo-brand operator Fast Retailing Co., while cheaper valuations than those in the U.S. or Europe will draw foreign investors back to the nation’s equities.
Credit Suisse Group AG agrees, as data show companies in Japan’s Topix index trading at 14.8 times expected earnings, compared with 17 for the S&P 500 and 15.8 for the Stoxx Europe 600 Index. Nomura Holdings Inc., which has the highest forecast for the Nikkei 225 at 23,000, sees Japanese e-commerce firms such as Rakuten Inc. as some of the cheapest against global peers, while drugmakers including Eisai Co. as some of the most expensive.
Yet the strong earnings momentum of years past may be fading, with brokers cutting back expectations for more growth. Companies in the Nikkei 225 are estimated to earn 1,108 yen per share over the next 12 months, down from 1,111 yen at the end of September, according to data compiled by Bloomberg. Unless figures are revised higher by the end of December, it would be the first time growth forecasts have fallen from the prior quarter since Abe came to power in late 2012.
The yen -- the main driver of share outperformance in recent years -- is expected to weaken 3 percent to 125 per dollar in the same period, the least since 2012, according to Bloomberg data.
Those potential obstacles, plus an expected slowdown in the U.S. economy, explain why Yoshinori Shigemi isn’t embracing the optimistic outlooks. “I don’t expect a lot of gains,” said Shigemi, a global market strategist in Tokyo at JPMorgan Asset Management. “Next year we’ll begin to see symptoms of a recession in the U.S. Not only will that have a direct impact on Japanese earnings, but the dollar may fall against the yen.”
If the Nikkei index falls short of targets, it wouldn’t be the first time: it returned three to four percentage points less than what forecasters estimated in the past two years.
The proposed sales tax hike scheduled for April 2017 is another issue expected to hang over the market in the second half of next year. Mizuho says unless Abe delays it, the economy will suffer. Nomura takes a more optimistic view, saying the economy will do well next year as consumers bring forward purchases ahead of the tax increase.
Mizuho, which expected the Nikkei 225 to close three percent higher last year than where it actually did, says the biggest event of 2016 will be the Upper House elections scheduled for June or July. It sees the index rising 16 percent to 22,000 by the end of June, before settling at 21,000 by the end of next year.
“The government will continue to prioritize measures to boost the economy and share prices until the Upper House election in July,” chief equity strategist Masatoshi Kikuchi and others at the brokerage wrote in an outlook report.
The Nikkei 225’s 90 percent rally since Abe came to power in late 2012 has been driven in large part by his yen-weakening policies. The currency’s descent accounted for more than 80 percent of profit growth in the 2013 fiscal year, according to Goldman Sachs. It accounted for 60 percent of recurring profit growth as recently as last quarter, according to Citigroup Inc.
“The yen is what has driven stock prices and company earnings higher for the last three years under Abenomics, but now that factor is fading,” said Yasuo Sakuma, portfolio manager and executive officer at Bayview Asset Management Co. in Tokyo. “It’s time to look for other drivers.”
8 Firms and Their 2016 Year-End Forecasts for Nikkei 225
Nomura Holdings Inc. -- 23,000
Goldman Sachs Group Inc. -- 22,700
Citigroup Inc. -- 22,700
Daiwa Securities Group Inc. -- 22,500
SMBC Nikko Securities Inc. -- 22,000
Merrill Lynch Japan -- 21,600
Credit Suisse Group AG -- 21,500
Mizuho Financial Group Inc. -- 21,000
Median -- 22,250