- We expect a tourism spending boost to support an improving domestic consumption, keeping Japan’s economy resilient when global growth is softening. We see a divergence in growth momentum between Japan and the western DMs.
- Balance sheets of corporate Japan are in a strong position. Companies were able to substantially raise cash reserves and the share of listed companies in Japan is now double that in US and Europe.
- Japanese equities are trading at a gapping discount to its long-term average. The region will be entering an economic slowdown with abnormally cheap valuations and we see limited room for further valuation compression during the initial stages of a recession.
- We expect the yen to reverse higher in 2023 after a significant weakening last year. Historically, a weaker yen has proven supportive for Japanese equities, largely through the boost in earnings. While this is true, we do not expect it to detract from Japanese equities’ performance.
- Amidst the challenging backdrop, we find Japan to be one of the few markets still supported by positive factors. The region’s attractive potential upside also sets it apart from DM peers. We remain positive on Japanese equities and upgrade the region from 3.5 Stars to 4.0 Stars.
Chart 1: Japanese equities had fared well in local currency terms but not so much in SGD terms
1. Re-opening of borders is a significant growth catalyst
Chart 2: Consumption has rebounded, after exiting the state of emergency in Mar ‘22, fuelled by services spending
Chart 3: Our expectations are aligned with consensus - Japan to deliver relatively stronger growth, after lagging in 2022
2. Balance sheet strength valuable when global growth decelerates
Chart 4: Japanese equities’ aggregate cash and cash equivalent has risen substantially over the past 2 decade
Chart 5: Close to 50% of JP listed companies are net cash, more than double that of US & Europe
3. Valuations still trading at a steep discount
Chart 6: Japanese equities are still trading at abnormally cheap valuations...
Chart 7: ...where around 80% of Nikkei 225 index’s constituents are trading at a discount to its 10-year average forward PE ratio
4. Currency tailwind from a yen reversal
Chart 8: Yen has depreciated dramatically in 2022, with the REER around historically low level
Chart 9: Foreigner ownership of Japanese equities are increasing since Nov ’22 but have largely declined since the pandemic
Risks from a steeper recession and a transition to policy tightening
Japan, our top equity pick entering 2023
Chart 10: Earnings forecast and price performance of Nikkei 225 Index
Table 1: Projections for the Nikkei 225 Index
|
Japan (Nikkei 225 Index) |
FY2022 |
FY2023 |
FY2024 |
FY2025 |
|
PE ratio (X) |
16.1 |
14.6 |
14.0 |
13.1 |
|
Projected earnings growth (YoY %) |
20.7% |
10.1% |
4.1% |
6.8% |
|
Projected Earnings Per Share (EPS) |
1,667 |
1,835 |
1,910 |
2,040 |
|
Target fair price (Based on 18.0X Fair PE ratio) |
- |
- |
- |
36,700 |
|
Potential upside (%) |
- |
- |
- |
37.0% |
|
Source: Bloomberg Finance L.P., iFAST estimates. Data as of 18 Jan 2023. *Fiscal year from April 1 to March 31 |
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The Research Team is part of iFAST Financial Pte Ltd.
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