Photographer: Tomohiro Ohsumi/Bloomberg

Japan's Best Stock Forecaster Sees Stability in Wake of Slump

Updated on
  • Pinebridge's Maeno expects modest growth for Topix in 2016
  • BOJ decision helps economy as yen, oil pressures seen easing

Last year’s best forecaster for the Topix index is looking past the carnage that has plunged Japanese stocks into a bear market, predicting a return of stability paving the way for modest growth in equities.

Tatsushi Maeno, head of Japanese equities at Pinebridge Investments Japan Co. in Tokyo, expects the Topix to end the year at 1,600 and the Nikkei 225 Stock Average to finish at 20,000. While he’s lowered year-end targets after both gauges fell more than 20 percent from their peaks, his forecasts still represent a gain of at least 9 percent from current levels.

Friday’s surprise easing by the Bank of Japan puts the economy and markets on the right track after January’s selloff, Maeno says. He remains confident that the market will be pricing in a moderate gain in earnings throughout the year, while pressure from oil and the yen will alleviate and U.S. and Chinese economic growth will remain stable.

“I expect the Goldilocks economic state we’ve had for the past two or three years to continue for a while longer,” Maeno says. “The U.S. has entered a rate hike cycle, but I expect Janet Yellen to judge the data well and keep a tight control. Meanwhile, both the BOJ and ECB may have additional easing but they won’t tighten their monetary policy in 2016."

Maeno’s forecast for last year made in December 2014 came within 3 points of where the Topix ended 2015, the best record among 10 strategists in a Bloomberg survey. The index rose 9.9 percent to finish the year at 1,547.30, one of the strongest performances among global markets as a weaker yen and record profits underpinned equity gains.

The Topix headed south in January, falling 7.5 percent for the worst start to a year since 2009 as worries about a slowing economy in China roiled financial markets. Oil plummeted to the lowest levels in more than a dozen years as brimming U.S. stockpiles and output from Iran exacerbated a worldwide glut. The yen touched the highest against the dollar in a year, threatening corporate profits for Japanese companies.

Maeno has made adjustments in the wake of the global rout, lowering his year-end forecast for the Topix by almost 5 percent, from 1,680 to 1,600. His new target implies a full-year gain of 3.4 percent, the weakest annual performance since 2011. The Topix slipped 0.5 percent to 1,455.43 as of 1:26 p.m. in Tokyo, while the Nikkei 225 Stock Average dropped 0.5 percent to 17,785.28 as crude oil resumed its rout.

Other forecasters in Bloomberg’s survey have also made adjustments. Citigroup Inc. strategists led by Naoki Iizuka cut their Topix target by a steeper 11 percent, from 1,850 to 1,650. They also lowered their expectations on earnings, valuations and the yen. Mizuho Securities cut its target from 1,700 to 1,600. At the end of last year, before the market selloff, strategists predicted the Topix would end 2016 at a median 1,800, a 16 percent advance.

Central Banks

While the strategists’ more muted outlook reflects January’s nosedive, stocks rallied more than 5 percent over the past two days after the BOJ imposed negative rates in a bid to revive lending. Adding to investor optimism are moves by other central banks to bolster economic growth. The European Central Bank’s indication it could expand stimulus as soon as March was followed by the Federal Reserve standing pat on interest rates and noting its concern over the global situation.

Maeno believes the BOJ’s decision strengthens his case for markets for the rest of the year, yet he doesn’t see a need to adjust his forecast for now. He predicts the yen will weaken to 125 to the dollar, and remains confident in a rebound in oil as well.

“U.S. monetary policy isn’t too aggressive, and there’s still plenty of possibility that Japan will ease again," he says. “Considering that divergence, the yen will weaken, not strengthen."

Maeno forecasts the price of oil will reach above $40 by the end of the year, from about $31 currently. And crude at relatively low levels should be positive for disposable income, especially in the countryside where people use cars more frequently, he notes.

He expects shares to lose steam toward the end of the year as investors become more aware of the sales tax hike scheduled for April 2017, but is confident that profit gains for listed companies in the next fiscal year will come in at a little under 10 percent.

As the case for solid earnings becomes stronger, “if foreign investors’ sentiment toward the market improves, they should start buying again,” Maeno says. “Where stocks fall, pension funds will buy as they rebalance their portfolios, and we should see buybacks from companies as well.”