The Nikkei entered a bear market on Thursday, crashing 6.4% at 12,445.
But Nomura just raised its year-end 2013 target for the Nikkei Average to 18,000, from 16,000.
They also raised their 2013-end target for the TOPIX to 1,500, from 1,350.
Nomura’s Hiromichi Tamura and the equity team explain why:
“The assumptions on which our forecasts are based have changed from “little sign of recovery in earnings” and “expectations for Abenomics” to “earnings recovery” and “rise in global P/E ratios”. We expect FY13 TOPIX-EPS to reach 82.5, surpassing its previous record high of 80. Japanese stocks are once again trading at lower P/E ratios than US stocks. Assuming that Abenomics has not been defeated, we see no reason to become bearish on Japanese stocks, and recommend a bullish stance.”
The Upper House elections set for July 21 are likely to see the government “pursue its growth strategies, which constitute the ‘third arrow’,” writes Tamura. This should give the stock market a nice boost. Here’s a chart that shows they type of growth strategies investors want to see:
With that in mind Tamura has a few recommendations:
“We think the full impact of Abenomics on capex and household incomes has yet to be felt, which means that there are still substantial investment opportunities in these areas. Our current recommendations are: (1) stocks generating strong earnings; and (2) stocks likely to benefit from the government’s growth strategies. We reiterate our view that Japanese companies need to be extremely determined if they are to achieve new record highs for ROE.”
He does however recognise the recent stock market rout. ” Indeed, we see it as significant because it constitutes a challenge to Abenomics. If share prices fall back to where they were before the BOJ announced its new phase of monetary easing (the 3 April Nikkei Average close of 12,362.20), this could prompt market observers to pronounce Abenomics a failure.”
The outlook for Japanese stocks could also vary depending on concerns about the Fed taper.
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