More Analysts Are Turning Bearish on Japan’s Stocks

(Bloomberg) -- More investors turned bearish on Japanese stocks, even before companies start reporting quarterly earnings that some analysts say will decline.

The world’s largest money manager, BlackRock Inc., and Singapore’s biggest bank, DBS Group Holdings Ltd., became the latest institutions to lower their weightings on the country’s shares, citing everything from a stronger yen to concern about the fallout from the U.S.-China trade war.

• BlackRock’s Investment Institute downgraded its stance to underweight in its mid-year 2019 outlook, mentioning the market’s vulnerability to a Chinese slowdown and a “policy-constrained” Bank of Japan.
• Last week, DBS also cut its recommendation to underweight in its asset allocation for the third quarter, pointing to weaker exports and a stronger yen.
• In June, Jefferies Financial Group Inc. moved to a “moderately bearish” view, saying the currency’s appreciation and the planned increase in the sales tax to 10% from 8% in October was the wrong mix.

And with Japan Inc.’s quarterly reporting season kicking off this month, analysts aren’t expecting strong results. SMBC Nikko Securities Inc. cut its fiscal 2019 corporate earnings outlook and noted that further forecast downgrades were possible, given the uncertainty surrounding the U.S.-China trade war, analysts led by Masashi Akutsu said in a June report. Recurring profit for Japanese stocks is set to grow 6.5% in fiscal 2019, compared with a previous estimate of 8.2%, according to the report.

Profit Decline

“We forecast a profit decline in the April-June period from the same quarter a year ago,” said Masaki Motomura, an equity strategist at Nomura Holdings Inc. “Given the impact of global trade frictions, the pace of global economic expansion would slow, affecting Japanese corporate earnings.”

Yaskawa Electric Corp. reported first-quarter profit that missed the average analyst estimate on Thursday, marking the start of Japan Inc.’s earning season.

Warning signals have already flashed elsewhere in Asia. Samsung Electronics Co. said last week that quarterly net income more than halved after a global industry downturn and trade tensions hammered demand. And it isn’t just Asia. The world’s biggest chemical maker BASF SE cut its 2019 sales and profit targets Monday, blaming a deepening economic slowdown and the China-U.S. trade spat.

The key for Japan’s earnings season will be when more than 2,500 companies report in the last week of July and first week of August. Investors will be keeping an eye on currency assumptions from exporters and profit forecasts for the rest of the year.

Bleak Picture

The latest bear calls add to an already bleak picture for Japanese shares. Overseas investors have sold a net 7.5 trillion yen ($69 billion) since the start of 2018, while the Topix has dropped 17% from a 26-year high in January last year. The benchmark index is up 5.7% this year, but it’s still the worst performer among 24 developed markets tracked by Bloomberg.

But Nomura’s Motomura adds a note of optimism on companies’ results in later quarters.

“We expect the profit decline to narrow,” he said. “China’s economic measures may help spur a rebound in Japanese earnings. We expect profit to increase in the October-December period or after.”

To contact the reporters on this story: Divya Balji in Singapore at dbalji1@bloomberg.net;Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Tom Redmond, Ravil Shirodkar

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