Wall Street investment banks have predicted an increase in Japanese stocks as they are suddenly back en vogue with global investors. Japan’s Topix, which is the Tokyo Price Index, has marked new peaks in the past two weeks, reaching its highest level since July 1990 on Monday. It has surged by 14% since the beginning of this year, most recently fuelled by optimism from a tentative debt-ceiling deal reached between US President Joe Biden and House Speaker Kevin McCarthy, alongside a boost from a weakening yen. The Nikkei 225 has also rallied further, gaining approximately 20% year-to-date.
Foreign Investors’ Positioning and Structural Changes
Goldman Sachs strategists have written in a research note that foreign investors’ positioning on stocks in Japan is still underweight. The strategists, Kazunori Tatebe and Bruce Kirk, added that they see Japan stocks benefiting from “structural changes” in the economy. The restructuring of corporate governance rules by the Tokyo exchange, aimed at improving shareholder returns, is seen as giving stocks a leg higher. The Goldman analysts said, “Given this large underweight and light positioning, we see potential for further large-scale inflows into the Japanese equity market in the event that steady progress with structural changes/reforms strengthens the confidence of foreign long-term investors.” They added that “If progress is made in accordance with investor expectations, Japanese stocks could see a prolonged advance over the medium term, and we continue to see risk to the upside for Japanese stocks.”
Forecasts and Buybacks
Goldman Sachs strategists see the Topix reaching 2,200 points by the end of the year, or a 3% rise from current levels. Bank of America strategists, Masashi Akutsu and Tony Lin, added in a research note last week that they see scope for further overseas inflows to cash equities, raising their year-end forecasts for Japanese indexes. “We believe the continued buyback momentum this year, coupled with the potential overseas inflows to cash equities similar to 2013, will likely sustain the market rally for the rest of the year,” they said. Buybacks are when firms purchase back their own shares to increase scarcity, thus increasing their price. BofA strategists see the Topix rising to 2,300 points, an additional 7% gain from current levels, with a bull case for it to rise even further to 2,400 points. They also see the Nikkei 225 rising to 32,500 points, an additional 4% from levels seen on Tuesday morning – with a bull case for 33,500 points.
Profitability and Earnings
BofA strategists also wrote that “If an inflationary regime becomes entrenched, and companies can achieve double-digit ROE [return-on-equity], this would bring a return to the 1989 high within reach,” noting that the Topix’s 12-month forward ROE stood at 8.8% last week. Return on equity is a gauge of a company’s profitability, measuring a firm’s net income divided by its shareholders’ equity. The BofA strategists concluded by stating that “Japanese stocks have not risen out of step with fundamentals, and we see further upside as long as earnings continue to improve.”
In summary, analysts at top Wall Street investment banks predict more upside for Japan’s benchmark indexes. The Goldman Sachs strategists see potential for further large-scale inflows into the Japanese equity market, with the Topix reaching 2,200 points by the end of the year. Bank of America strategists see scope for further overseas inflows to cash equities, raising their year-end forecasts for Japanese indexes. They see the Topix rising to 2,300 points and the Nikkei 225 rising to 32,500 points. The profitability and earnings of Japanese stocks are expected to improve, and if an inflationary regime becomes entrenched, the return to the 1989 high would be within reach.
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