Child Care, Defense Stocks May Win in Japan's Snap Poll: Goldman

If Prime Minister Shinzo Abe manages a victory in Japan’s upcoming snap election, the real winners may be child and nursing care providers as well as defense contractors, according to Goldman Sachs Group Inc.

Japanese stocks have risen about 1 percent since Abe dissolved the lower house last week, signaling that the market expects the ruling coalition winning a majority of parliament seats as “the most-likely outcome” for the election on Oct. 22, Goldman Sachs strategists led by Kathy Matsui wrote in a note dated Wednesday.

Scenario

Stock market reaction

What to buy and sell

Abe coalition wins majority Neutral, as widely expected Child and nursing care services, defense stocks may benefit
Koike coalition wins majorityInitially negative, but eventual reboundStocks with high foreign-ownership and valuations may be sold/defensives bought
Neither Abe nor Koike coalition wins and other parties make big gainsNegative reaction may persistStocks with high foreign-ownership and valuations may be sold/defensives bought
Source: Goldman Sachs

While the overall market reaction in this scenario would likely be neutral given its high probability, it should serve to focus attention on the pledge by Abe’s Liberal Democratic Party to increase spending on child-rearing, education and defense, Goldman said. The broker’s picks among potential beneficiaries of this outcome range from the consumer-focused Unicharm Corp. and Benesse Holdings Inc. to large industrials such as Mitsubishi Heavy Industries Ltd. and IHI Corp.

Failure by the ruling coalition to secure a majority followed by a resignation by Abe could prompt further equity selling by foreign investors, the strategists said. Foreigners have been net sellers of Japanese stocks for the past three months, while the benchmark Topix index has climbed 11 percent this year and is trading near a two-year high.

Goldman says a change in political leadership could lead to profit-taking on stocks with high foreign ownership and valuations, such as Kao Corp. and JXTG Holdings Inc. On the other hand, it highlights “quality defensive stocks” that should be more resilient in a possible market correction under this scenario, including Nippon Telegraph & Telephone Corp. and Canon Inc.

If a coalition led by Yuriko Koike’s upstart Party of Hope wins a majority, the market may react negatively at first as it would be seen as the “end of Abenomics,” but it would eventually recover given the similarities between this group and the ruling block, Goldman says. In the event neither of these two groups secures most of the seats, the strategists say the ensuing fragmentation and parliamentary gridlock could result in a prolonged negative impact on Japanese stocks.

A win by either Abe or Koike could lead to a revision of the constitution and the bolstering of national security, Goldman says. The broker adds that if the LDP group fails to achieve victory, their plan to raise the sales tax could be delayed, and there may be a push to phase out nuclear power in Japan.

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