Morgan Stanley Sees Topix Drop as Goldman, Nomura Boost View

Morgan Stanley, previously the most bullish brokerage on Japanese stocks, says the Topix Index will fall about 10 percent as investors await corporate earnings and progress on promised economic reforms.

Japan’s broadest equity measure may fall to 1,020 “in the near term,” according to Morgan Stanley which in March had a year-end estimate for the Topix of 1,270, the highest among brokerages and asset managers surveyed by Bloomberg News. The company isn’t changing its outlook even as others including Nomura Holdings Inc. and Goldman Sachs Group Inc. raise their forecasts, Jonathan Garner, Hong Kong-based chief strategist for Asia and emerging markets, said by phone.

“We’ve gone from an expectation phase to a now more difficult delivery phase,” Garner said. “From here on out, we think yen weakness will be slower. Companies need to deliver on earnings and we need delivery on a macro-economic side.”

The Topix has surged 57 percent from Nov. 14, when elections were announced that brought Prime Minister Shinzo Abe to power on a platform of massive stimulus and trade liberalization to beat 15 years of deflation. The Bank of Japan said this month that it would double the monetary base in two years, spurring the fourth Japan-share outlook upgrade for the year at Goldman Sachs and a third by Nomura. Nomura’s target is 1,350 by year end while Goldman’s sees the same level within 12 months.

“Unlike some of our competitors, we’ve chosen not to raise our target price post the BOJ meeting,” said Garner. “A lot more needs to be done. However that process will be more subject to setbacks along the way and will take longer in terms of delivery.”

Average Outlook

The average estimate for the end of the year for the Topix is 1,160, according to a Bloomberg survey of 15 analysts. That’s a 21 percent gain from the March average of 961. The measure fell 0.6 percent to 1,129.32 as of 2:49 p.m. local time, as the yen gained 0.2 percent to 97.97 against the dollar.

When Morgan Stanley raised its Topix forecast last month, the brokerage estimated earnings per share on the measure to increase by 50 percent in 2013, Garner said. The average analyst estimate is now for growth of 45 percent, he said, thus “limiting the further potential for earnings upgrades” that would boost share prices.

Positive earnings estimates and reflationary expectations have caused share prices to rise, making valuations less attractive, said Garner. The Topix index is now trading at about 1.3 times book value. That compares with a low of 0.82 times the value of net assets on June 4 last year, when the measure closed at its bottommost level since 1983, according to data compiled by Bloomberg. A value below one means a company can be purchased for less than the reported value of its assets.

‘Extremely Overbought’

The measure is also trading at about 36 percent above its 200-day moving average, Bloomberg data show. That’s the most since 1987, the 10th year of a 12-year win streak before the bursting of the country’s asset bubble at the end of 1989, the data show.

“Technically it is extremely overbought,” said Garner. “We can only find two previous occasions in the entire history of Japanese equities when it has been more overbought -- in 1973 and 1987. The obvious cheapness of Japan has gone away.”

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