Goldman Sachs cuts outlook for Japan stocks amid political uncertainty, yen rises

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Goldman Sachs cut its targets for Japan’s Topix index as the stock market there has been hurt by multiple headwinds, including domestic political uncertainty, yen appreciation, mixed economic data and global trade tensions.

It cut its three-, six- and 12-month Topix targets to 1700, 1800 and 1950, respectively, down from 1800, 1850 and 2000 previously. The Topix ended Tuesday down 0.29 percent at 1703.80. The dollar was fetching 106.15 yen on Tuesday at 6:30 P.M. SGT.

The miserable stew of factors has led to 8.2 trillion yen in cash and futures liquidations by foreign investors in the January-to-March period, the bank noted.

But Goldman added that it remained “constructive” on Japan’s market.

“Heading into the new fiscal year, these lingering headwinds may limit the market’s upside near term; however, since the market is
already discounting a scenario whereby EPS falls by 10 percent in fiscal 2018, we believe the downside is limited,” it said. “Even assuming a dollar-yen rate of 105 for fiscal 2018-19, we expect profits to continue growing (up 3.5 percent in fiscal 2018, up 8.8 percent in fiscal 2019), supporting a market recovery over the medium-term.”

Even if the dollar/yen were to go to 100 in fiscal 2018, profits would still rise, although more slowly, the bank said.

Political scandal

Additionally, when it comes to domestic political concerns, Goldman said its main scenario was that the Cabinet’s approval rating will remain above the 30 percent level and that Prime Minister Shinzo Abe would be re-elected to a third term in the party presidential elections in September. That’s despite a continuing political scandal.

Even if Abe isn’t re-elected, he’s likely to be replaced by another leader from his party and the overall framework of Abenomics would likely remain intact, Goldman said.

Goldman also noted that the direct impact from U.S. trade friction was likely to be limited as Japanese exports to the U.S. account for less than 3 percent of Japan’s gross domestic product (GDP).

It also noted that foreigners are among potential buyers that could come back into the Japanese market.

“Since many long-only overseas investors remain substantially underweight their benchmarks in Japanese equities, we believe the scope for foreign buying remains significant over the medium-term,” it said.

Sector calls

Goldman said it was focusing its overweight positions on sectors with positive earnings-revision momentum and firm growth outlooks, such as energy, and beneficiaries of growing IT capex demand, such as machinery, industrial electronics and IT services.

It upgraded household products and the software and internet sectors to Overweight from Neutral and the pharmaceuticals sector to Neutral from Underweight, saying these sectors have stable earnings profiles and immunity from macro factors.

But Goldman downgraded the securities, other financials and insurance sectors to Neutral from Overweight, saying the prospects of the Bank of Japan adjusting monetary policy appear more slim now than at the start of the year.

It also downgraded the construction sector to Underweight from Neutral, citing an overall deterioration in earnings prospects.

Goldman screened for companies with high profit growth and positive earnings revisions, with stocks that have underperformed the Topix index so far this year and with valuations that aren’t stretched.

That picked up conviction list calls Hitachi, JFE Holdings and SUMCO, and Buy-call rated shares Fast Retailing, Isuzu Motors, NSK, Daifuku, Brother Industries, Amada Holdings, Ulvac, Okuma and CKD.