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A Bout of Downgrades on Japan Stocks Hints at Delayed Recovery

A Bout of Downgrades on Japan Stocks Hints at Delayed Recovery

(Bloomberg) -- Analysts are scrambling to downgrade shares of Japanese companies on concern that the fallout from the coronavirus outbreak could be more severe than previously projected.

The ratio of cumulative monthly upgrades to downgrades on Topix index members has fallen below 1 in April for the first time this year. Last month, it climbed to its highest since May 2010 after the steep virus-led sell-off tanked valuations, making equities attractive.

With the earnings season set to kick into high gear next week, companies one by one have begun to reveal the extent of the damage from the pandemic, with many declining to provide forward guidance.

“Any lingering uncertainty over corporate earnings will leave a negative impression on investors,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management in Tokyo. If companies push back making forecasts, the stock-market recovery will be delayed as well, he said.

A Bout of Downgrades on Japan Stocks Hints at Delayed Recovery

The benchmark Topix index has risen 16% from its March 16 low but is still down 18% from its Dec. 17 high. It’s unclear how much optimism is warranted, with Prime Minister Shinzo Abe declaring a state of emergency for several regions in Japan earlier this month as the number of virus infections spiked. Shares of exporters will likely suffer as well, as their earnings take a hit from the big downturn expected in the U.S. economy in the June quarter, Kinoshita said.

With analysts positioning themselves amid this uncertainty, Japanese equities have seen a total of 87 downgrades versus 72 upgrades this month through April 14, according to data compiled by Bloomberg. Downgrades were concentrated in cosmetics and apparel retailers, as well as technology and finance companies. Blue-chip victims included Nintendo Co., and mobile carriers NTT Docomo Inc. and KDDI Corp.

©2020 Bloomberg L.P.