Japan Stock Traders Look Past Bad Earnings to Bet on Turnaround

(Bloomberg) -- Japan’s equity investors are looking beyond the most disappointing earnings in three years, betting on a turnaround in the market on the view that valuations are cheap and the Bank of Japan will step up easing.

Some 60% of the 1,572 companies that reported first fiscal quarter earnings as of Aug. 6 are behind schedule, achieving less than 25% their annual net profit targets, according to data compiled by Bloomberg. Analysis from Mitsubishi UFJ Morgan Stanley shows that the proportion of the firms beating earnings expectations dropped to the lowest in fiscal 2017.

Still, stock bulls are quick to point out that shares are getting cheap now that the Topix has erased its year-to-date gain. Japan’s benchmark has been one of the worst-performers among the 24 developed markets tracked by Bloomberg for months. Its forward P/E ratio dropped to around 12 times, compared with a five-year average of 13.4 times.

Japan Stock Traders Look Past Bad Earnings to Bet on Turnaround

“It’s definitely worth dipping in,” Mikio Kumada, a Hong Kong based global strategist at LGT Capital Partners, said in a phone interview. “I do expect Japan to be performing -- maybe not outperforming globally in the second half -- but certainly catching up with the other markets.”

According to Kumada, the equity market in Japan shouldn’t be falling so far behind the U.S. and China, given that monetary policies are accomodative at home and abroad. He also expects a bottoming out of China’s economy to support growth in Japan. Both the S&P 500 Index and Shanghai Composite Index are up more than 10% this year.

For those investors worried about the yen’s strength, Daiwa Securities Co. says don’t fret too much. The currency’s surge to a seven-month high against the dollar isn’t drastic enough to alter the outlook for profit growth for the second half of this fiscal year, according to the firm. The yen is at about 106.4 per dollar, versus the rate of 108 forecast in many companies’ annual results.

Daiwa Securities estimates that companies on the first-section of the Tokyo Stock Exchange are likely to report an average growth of 12.5% in ordinary profit in the second half. While that is lower than its previous estimates, it would be a turnaround from profit declines expected for the first half ending September. The forecasts exclude figures for SoftBank Group Corp. and Tokyo Electric Power Co.

Japan Stock Traders Look Past Bad Earnings to Bet on Turnaround

“We’re looking at a turnaround in earnings in the second half of this fiscal year,” said Hideyuki Ishiguro, a senior strategist at Daiwa Securities in Tokyo. “The recovery scenario is intact.”

Not everyone is that optimistic. Mitsushige Akino, the executive officer at Ichiyoshi Asset Management Co., said the market lacks confidence to boost stock prices. The leading coincident index, a key economic measure, fell in June to a level unseen since the wake of the financial crisis, fueling concern about the economy before an October sales-tax hike.

Some bulls like LGT’s Kumada are betting the BOJ will come to the equity market’s rescue. The central bank said last month it’s “more positive” about adding monetary stimulus as it eyes a global shift toward interest rate cuts. Governor Haruhiko Kuroda kept policy unchanged in July, while trimming inflation forecasts.

READ MORE: BOJ Watchers See Growing Chance of More Stimulus in September

“As bottom-up investors, we are looking for opportunities to buy stocks at prices which do not factor in future earnings growth,” said Tony Glover, a senior investment specialist at BNP Paribas Asset Management Japan based in Tokyo. “We’d like to think that at times like this where the market is being sold off, the chances of being able to do so increase.”

©2019 Bloomberg L.P.

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