This year’s rally in Japanese stocks, which has driven the Topix to its highest level in more than three decades, is set to extend as earnings growth, share buybacks and still-low valuations lure buyers.
(Bloomberg) — This year’s rally in Japanese stocks, which has driven the Topix to its highest level in more than three decades, is set to extend as earnings growth, share buybacks and still-low valuations lure buyers.
That’s the view from market watchers at CLSA Securities Japan Co. and Monex Inc. A promising earnings season has been the latest catalyst for Japan equities, which were already shining bright following Warren Buffett’s renewed endorsement and local corporate governance improvements. Though not spectacular, Japan Inc.’s results and annual guidance offer investors promise — with Topix firms forecasting operating profits to rise about 6% in the financial year ending March 2024. History shows that companies typically tend to make conservative estimates.
“Overall, earnings seem pretty good, with the important auto sector expecting profit growth,” said Takashi Hiroki, chief strategist at Monex, the third-largest online broker in Japan . “Domestic demand-oriented companies are benefiting from the prospects of increase in inbound tourism while big banks also had bumper earnings.” Hiroki expects further gains of 10% or more by the end of the year.
Up more than 12% in 2023, the Topix is already the best performer among national equity gauges in Asia and is outperforming a broader regional benchmark by more than 8 percentage points.
While the Japanese gauge is at a 33-year high, it is hardly expensive given a price-to-book ratio of 1.3 times, compared with a multiple of 4 for the S&P 500 Index and 1.8 for the Stoxx Europe 600. Cheap valuation is the key reason why Nicholas Smith, a strategist at CLSA, is predicting a further rally of at least 10%.
To be sure, the global backdrop poses a risk for Japan’s export-driven market. Rie Nishihara, chief Japan equity strategist at JPMorgan Chase & Co., said the debt-ceiling issue in the US could pose a setback.
For now though, foreign funds are piling in as concerns about recession in the US and Europe, as well as geopolitical risks surrounding China turn Japanese stocks into some sort of a haven trade. Share buybacks remain at record levels, with investors expecting more to follow after the push from the country’s stock exchange on companies with low valuation to think about measures to lift their market values. Buybacks in the U.S. have slowed.
“I don’t expect a runaway bull market, but the market is well backed by fundamental value,” said Peter Tasker, co-founder and strategist at Arcus Investment.
READ: Goldman Sees More Japan Upside as Topix Approaches 33-Year High
Since global stock prices bottomed out on March 15, the Topix has gained 8.5%, the best performance among major markets. The S&P 500 index advanced 5.6% while the MSCI Asia Pacific index added 3.4% in that span.
“Given that the P/B ratio is still around 1.2 times, even if there is some sort of crisis in markets, it would be a big buying opportunity for long-term investors like us,” said Masayuki Murata, general manager of balanced portfolio investment at Sumitomo Life Insurance Co.
–With assistance from Winnie Hsu and Yasutaka Tamura.
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