Worlds highest stock valuations signal Japanese recovery

Written by Bloomberg | Updated: Apr 24 2012, 09:07am hrs
Japans stock market, hobbled by more than a decade of deflation, is showing companies will stage a full earnings recovery from the worst nuclear crisis since Chernobyl, pricing in the biggest increase in profits compared with other countries since 2001.

Income in the Nikkei 225 Stock Average will rise by 69% in 2012, after plunging 31% last year, according to more than 2,600 analyst estimates compiled by Bloomberg. At 24.5 times reported earnings, Japanese equities are the most expensive among the worlds 60 biggest markets, trading so high that only by meeting analysts forecasts will ratios come back in line with global stocks, data compiled by Bloomberg show.

The worst is over for Japan in terms of earnings, Masafumi Oshiden, an investment manager at ING Mutual Funds Management, said in a telephone interview on April 18. The firm oversees about 1.5 trillion yen ($18.4 billion). Consumer spending is improving and corporate earnings are rebounding. The cautious mood following the quake is gone.

Bulls say the valuations show confidence in a recovery that will help Japanese stocks close the gap with the MSCI All- Country World Index, which has risen almost three times as much since 2009. Bears point to combined annual losses from Sony and Sharp of 900 billion yen and an economy that has contracted three of the past four years as evidence the Nikkei 225, which has rallied 17% since November, has come too far, too fast.

The rate of profit growth in Japan is forecast to exceed global earnings by the most on record, with analysts projecting income in the MSCI All-Country World Excluding Japan Index will rise 10%this year, according to data compiled by Bloomberg. Canon, Fanuc and Japan Tobacco are among 70 companies in the Nikkei 225 scheduled to post results in the next two weeks.

The Nikkei 225 fell 0.2% to 9,542.17 in Tokyo. The index would trade at 14.8 times earnings should analyst profit forecasts for this year materialise and stocks neither rise nor fall, according to data compiled by Bloomberg. Thats 24%cheaper than the six-year average for the gauge and comparable to a multiple of 12 for MSCIs global equity index that excludes Japans shares. While Japanese companies are on track to recoup losses from the record magnitude-9 earthquake in March 2011, the economy still faces a shrinking population, the worlds highest debt burden and a currency near the strongest level since World War II. The Nikkei 225 is 75% below the December 1989 peak reached during the nations housing bubble and the yen has tripled in the past 30 years.

The index is 6.8% below its close on March 11, 2011, even after a 13% rally this year, the fifth-best performance among 24 developed markets around the world. Policy makers in Tokyo have committed to 20 trillion yen in relief spending to rebuild towns and spur economic growth. Bank of Japan Governor Masaaki Shirakawa pledged during a speech in New York last week to continue adding monetary stimulus.

Japans economy will limit gains in stocks, according to Shane Oliver, the Sydney-based head of investment strategy at AMP Capital Investors Ltd., which oversees about $100 billion. Gross domestic product may increase 1.6% this year, compared with an estimated 2.3 percent global expansion, according to Bloomberg survey.