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With Japanese stocks suddenly back in favor of global investors, analysts at top Wall Street investment banks are predicting more upside for the country’s benchmark index.
Japan’s Topix index (Tokyo Price Index) has hit new highs in the past two weeks, hitting its highest level since July 1990 on Monday.
It has risen 14% since the start of the year, driven most recently by optimism over a tentative debt-ceiling deal between U.S. President Joe Biden and House Speaker Kevin McCarthy and a boost from economic weakness JPYMeanwhile, the Nikkei 225 has risen further, gaining about 20% so far this year.
Foreign investors remain underweight in Japanese stocks, Goldman Sachs strategists wrote in a research note on Monday.
“While we think short-term investors such as CTAs (commodity trading advisors) are tight, foreign long-term investors remain light,” said strategists Kazunori Tatebe and Bruce Kirk.
They added that they believed Japanese stocks benefited from “structural changes” in the economy. A Restructured Corporate Governance Rules Moves by the Tokyo Stock Exchange aimed at boosting shareholder returns were also widely seen as sending stocks higher.
Goldman Sachs analysts said: “Given this sharp reduction and liquidation, if the steady progress of structural changes/reforms strengthens the confidence of foreign long-term investors, we believe that further large-scale inflows into Japanese equities are likely.”
“If progress matches investor expectations, Japanese equities could see a secular upside in the medium term, and we continue to see upside risks for Japanese equities,” they added. Strategists at Goldman Sachs expect Topix to reach 2,200 by the end of the year, or a 3% gain from current levels.
Raise year-end goals
Bank of America strategists Masashi Akutsu and Tony Lin added in a research note last week that they saw room for further inflows from overseas into cash stocks — raising their year-end forecast for the Japanese index.
“We believe that continued buyback momentum this year, combined with the likelihood of similar overseas inflows into cash equities as in 2013, could sustain market gains for the rest of the year,” they said. A buyback is when a company buys back its own stock to increase scarcity and thus its price.
Bank of America strategists expect the Topix to rise to 2,300, another 7% gain from current levels, with a further rise to 2,400 on track. They also expect the Nikkei 225 to rise to 32,500, up 4% from Tuesday morning’s level — with a bull market on track for 33,500.
“If the inflationary regime becomes entrenched and companies are able to achieve double-digit ROE (return on equity), this would put a return to the 1989 highs within reach,” they wrote, pointing to Topix’s 12-month forward ROE was 8.8% last week. Return on equity is a measure of a company’s profitability, measuring a company’s net income divided by shareholders’ equity.
“The rally in Japanese equities is not out of touch with fundamentals, and as long as earnings continue to improve, we could see further gains,” they wrote.