Bloomberg News

Goldman Joins Japan Stock Bulls as Abe Advance Seen

January 15, 2013

Goldman Sachs Group Inc., Bank of America Corp. and Nomura (8604) Holdings Inc. are predicting Japanese stocks will extend their longest streak of gains in 23 years as extra economic stimulus boost earnings.

The Topix Index, Japan’s broadest gauge of share performance, rose for nine straight weeks through Jan. 11, the longest stretch since December 1989 (TPX), when it hit a record 2,886.5. Goldman Sachs boosted its estimate to 1,000 on Jan. 7 from 930, while Bank of America increased its 12-month estimate to 1,250 from 1,050, according to a Jan. 11 note from Tokyo- based chief equity strategist Naoki Kamiyama. That’s a gain of 39 percent from the last close of 898.69.

Prime Minister Shinzo Abe announced 10.3 trillion yen ($116 billion) in additional stimulus measures on Jan. 11 and is pressuring the Bank of Japan to double its inflation target to 2 percent after the third recession in five years. Goldman Sachs is buying shares of exporters, financial firms and utilities, Hiroyuki Ito, Tokyo-based head of equity investment at Goldman Sachs Asset Management Co., said last month.

“Abe is not just talk, but is about action,” Jesper Koll, head of equity research at JPMorgan Chase & Co. in Tokyo, said Jan. 11. “In his first 30 days, it’s really quite impressive in that you have a concrete supplementary spending.”

Koll has a 12-month target of 1,050 for the Topix. Analysts surveyed in December said the Topix would rise to 905 by year- end, according to the median of 14 estimates. Predictions have been revised up after Abe’s Liberal Democratic Party was returned to power at Dec. 16 elections. The Topix increased 0.8 percent to 906.22 today.

Earnings Boost

All 33 industries on the Topix advanced since Nov. 14. Securities companies led, as Nomura, the country’s biggest brokerage, jumped 72 percent and Daiwa Securities Group Inc. (8601) surged 49 percent as the market rallied. Gauges of shipping companies and iron and steel manufacturers recorded the second- and third-biggest increases.

A weaker yen and Abe’s stimulus policies will boost earnings, according to a Jan. 7 note from Goldman Sachs analysts led by chief Japan strategist Kathy Matsui. The yen fell below 89 to the U.S. dollar last week and is trading at its lowest level since June 2010. The currency has declined 11 percent since the election was announced.

The Nikkei 225 Stock Average will advance 9.7 percent to 11,860 by year end, Jefferies Group Inc. analysts led by Sean Darby, chief global equity strategist said Jan. 10, citing improving trade ties with China as a catalyst for earnings.

“Earnings are forecast to rise more than 20 percent in fiscal 2013 and Japanese stocks remain relatively cheap,” said Masahiro Fukuda, investment director at Fidelity Worldwide Investment in Tokyo. “Even before talk on Abe-nomics began, Japanese stocks could’ve rebounded to this level without counting the impact of a rapid drop in the yen on earnings. Valuation justifies further gains when you take a weaker yen into account.”

1983 Levels

Income per share on the Topix Index will climb 56 percent in the next year, according to estimates compiled by Bloomberg. That compares with a 13 percent increase for the Standard & Poor’s 500 Index and 27 percent for the Shanghai Composite Index, the data show.

The Topix trades for 1.06 times book value, up from 0.82 times the value of net assets in June, the lowest ever, according to data compiled by Bloomberg going back to 1993. The gauge closed at 695.51 on June 4, a level not seen since 1983.

Nakayama Steel Works Ltd. (5408), which gets all its revenue from Japan, almost doubled in value during the nine-week rally, surging 97 percent and leading gains by makers of the material on speculation Abe will pursue greater public-works spending.

Export Prospects

Nippon Yusen K.K. (9101), Japan’s biggest shipping line by market value, added 42 percent as the yen’s decline and signs of recovery in the economies of China and the U.S. boosted the propects for exports. Progress in halting the spread of Europe’s debt crisis also improved the outlook for the company, which receives 39 percent of revenue from routes to the continent.

I’rom Holdings Co. (2372), a supplier of equipment and management services to medical institutions, gained the most among the Topix’s 1,687 members, surging 224 percent from Nov. 14. Kubotek Corp., a maker of inspection systems for display manufacturers including South Korea’s Samsung Electronics Co., recorded the second-biggest advance, jumping 178 percent.

This isn’t the first time analysts have called for a rally in Japanese shares.

A surge from November 2010 through the start of 2011 was cut short by the March 11 earthquake. Forecasts for a recovery in share prices on the back of reconstruction spending were dashed as the government of former Prime Minister Yoshihiko Noda proved unable to restart the economy. The yen rose as Europe’s sovereign-debt crisis and an uneven recovery in the U.S conspired sent investors in search of safer assets.

Growth Challenge

“Expectations for policy action will lead the market, but I’m not sure how much impact it will actually have on earnings,” said said Shintaro Shinohara, who helps oversee about 11 trillion yen ($124 billion) as the head of equity investment at Prudential Investment Management Japan Co. “It’s not going to be a one-way rally. Globally, Europe’s growth will be about 1 percent, the U.S. faces uncertainty and China’s not going to expand as fast as previously.”

Japan faces domestic problems as well. More than 25 percent of people are older than 65 and the country’s government debt has balooned to 185 percent of gross domestic product. The country’s shares trade about 70 percent below their 1989 level.

Of the stimulus package announced Jan. 11, about 3.8 trillion yen will be for disaster prevention and reconstruction, with 3.1 trillion yen directed to stimulating private investment and other measures, according to a statement released by the Cabinet Office. Extra spending will increase gross domestic product by about 2 percentage points and create about 600,000 jobs, the government said.

Game Changer

Japan’s currency slid below 120 per euro yesterday for the first time since May 2011 after Abe said he wanted someone “who can push through bold monetary policy” as the next Bank of Japan (8301) governor. The BOJ meets next week.

“This year may become a game-changing year for Japanese stocks,” said Takashi Ito, an equity strategist at Nomura in Tokyo. “The new government are aiming to support corporate growth and let Japanese companies lead the Japanese economy.”

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Masaaki Iwamoto in 東京 at miwamoto4@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net


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