Merrill Sees Foreigner Buyers Extending Nikkei 225 Rally

The Nikkei 225 Stock Average, heading for a 12-week winning streak, will rise a further 12 percent by June as foreign investors add to their Japanese holdings, according to Bank of America Merrill Lynch.

Overseas investors were net buyers of the shares for 11 weeks to Jan. 25, according to Japan Exchange Group Inc. That’s pushed stocks to a 2 1/2-year high as a slide in the yen improves the profit outlook for exporters. The rally will pause before accelerating again in May when the benefit of a weaker currency shows itself in corporate earnings reports, according to Naoki Kamiyama, the brokerage’s chief Japan equity strategist.

“The rally will take another step up once overseas investors gain confidence in earnings,” Kamiyama said yesterday in an interview in Tokyo after returning from a sales trip to Europe. “Investors are still of two minds about the recent gains, and they need to see changes in the fundamentals in order to buy in whole-heartedly.”

Kamiyama’s bullish forecast comes after Goldman Sachs Group Inc. raised its target price for Japanese equities twice last month, saying growth in earnings per share will exceed all other developed markets next fiscal year. JFE Holdings Inc. and Sumitomo Mitsui Financial Group Inc. are among the 63 percent of Nikkei 225 companies that reported better-than-estimated net income so far this quarter, according to data compiled by Bloomberg.

Japan’s market has a history of disappointing investors. The Nikkei 225 has fallen in four of the previous five years and the benchmark is still 71 percent below its 1989 peak.

Abe’s Boost

The index has risen about 29 percent from Nov. 14, when elections were announced, on optimism the Liberal Democratic Party would press the central bank to buy more bonds and raise its inflation target. The yen weakened 12 percent over the past three months and touched 91.79 today, the weakest level since June 2010.

The world’s third-largest economy is forecast to emerge from three quarters of shrinking growth in the current three-month period, according to estimates compiled by Bloomberg News. The economy will grow 1.6 percent on an annualized basis in the three months through March after shrinking 0.6 percent the previous quarter, the estimates show.

“Investors are worried about whether there will be a second run of gains,” said Kamiyama said, who joined Merrill Lynch from Deutsche Bank AG in September. “Even if the yen stays at current levels, the effects of it will start to show in earnings and the market will shift to growth-led momentum.”

Kamiyama said he met with 26 clients, including multi-asset funds and hedge funds, during a trip to England and France this month. He had to extend his stay, originally planned for three days, to 7 days as investors asked for more meetings, he said.

“It used to be that clients really had no interest in hearing about Japanese stocks,” said Kamiyama. “Now even the skeptics wanted to hear the presentation. They’re fearful of missing out on the rally.”

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