Japan can’t seem to stop the bad news from coming. The world’s third-largest economy contracted by an annualized 1.1 percent in the final quarter of 2015; industrial production plunged 6.2 percent month over month in February, the biggest drop in nearly five years; and in late March the Cabinet Office lowered its economic assessment, essentially acknowledging that growth is faltering.
“The judgment by the government is quite reasonable in that the economy appears to be leveling off since the fourth quarter,” observes Jun Konomi, head of Japanese equity research at Nomura. “Private consumption remains stagnant, although the rate of growth in real consumption looks underestimated by the distortion in the household survey statistics.”
However, he believes a turnaround is imminent. “We expect growth to pick up again in the second quarter and continue to stay at moderately positive levels until consumption surges before the implementation of the next consumption tax hike, in April 2017,” he explains.
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That’s hardly likely, counters Nobuyuki Saji, Mitsubishi UFJ Morgan Stanley Securities Co.’s famously bearish economist. “We take a rather cautious stance on the government’s view that the economy will gradually recover supported by the improvement of the employment situation,” he says. “Consumer spending by the elderly has structurally weakened since the onset of Abenomics, and the slump in consumer spending has now been spreading to working households against the backdrop of growing uncertainty in corporate profits.”
Much will depend on the steps the administration of Prime Minister Shinzo Abe takes to spur growth. Additional stimulus spending? A postponement of the sales tax increase? These options and others are on the table, but nothing has been decided yet.
With so much uncertainty money managers are looking to the sell side for help in understanding how best to invest in this market. The firm whose guidance is most revered is Mizuho Securities Group, which tops Institutional Investor’s All-Japan Research Team for a third consecutive year. The firm captures 28 total team positions, the same number as last year and five more than its rival in second place, Nomura. SMBC Nikko Securities holds steady at No. 3 despite its picking up three spots, for a total of 22; while Daiwa Securities Group stands firm in fourth place even though its total declines by one, to 17. UBS adds one position, bringing its total to ten — that’s enough to propel the Swiss bank from seventh place to fifth and earn the title of this year’s highest-ranking nondomestic firm.
Survey results reflect the opinions of more than 1,100 individuals at 357 buy-side institutions that collectively manage an estimated $1.2 trillion in Japanese equities.
Click on Leaders in the navigation table at right to see the full list of ranked firms, or Best Analysts of the Year to view profiles of the people in first, second and third places and to find information about when the researchers debuted in their sectors, the total number of appearances they have amassed to date, their total appearances at No. 1 (where applicable) and comments from money managers about what distinguishes each analyst from his or her peers.
Also available at that link is a list of analysts who earn a runner-up spot in each sector. Please note: Information about individuals in the second and third positions, and runners-up, is available to subscribers only.
Mizuho is more upbeat than many firms on Japan’s expansion prospects for the fiscal year that began April 1. “We see real gross domestic product growth of 1.5 percent,” reports Yohei Osade, global head of pan-Asian equity research.
In January the Bank of Japan introduced negative interest rates. The policy is likely to result in outperformance by companies in the construction and real estate sectors, he says, while food, information technology and telecommunications names should best the broad market thanks to stable earnings growth and possible dividend hikes.
On the opposite end of the spectrum, electronics and electric power companies will underperform because of their gloomy earnings outlooks, Osade says, and “we expect banks and insurance companies to underperform due to the harmful impact of negative rates.”
UBS’s fiscal 2016 GDP forecast isn’t far behind, at 1.3 percent, according to Toshihiko Okino, head of Japan research and a member of the All-Japan Research Team Hall of Fame. (He’s the No. 2 analyst in Housing & Real Estate this year.)
“We expect the yen to resume weakness over the balance of this year, and the key beneficiaries of this are likely to include the autos, machinery and steel sectors,” Okino explains. “We also expect those companies with the market positioning and wherewithal to increase shareholder returns to continue to lead the market.”
He is also bearish on banks — “the sector most challenged by the negative interest rates policy” — and retail, “because it appears that spending by inbound tourists peaked over the past year.”
Ryota Sakagami, who captures first place in Equity Strategy for a second straight year, disagrees insofar as the latter category is concerned. “Low-beta, low-volatility sectors such as construction, telecommunications, retail and services will continue to outperform in the short term, owing to the uncertainty in the global economy,” the SMBC Nikko strategist maintains. “In the second half of the year, I expect outperformance of reversal names, especially such yen-sensitive sectors as autos, technology and machinery.”
Real estate is the industry to watch, insists Nomura’s Konomi. “This sector has underperformed despite favorable fundamentals,” he notes. “We expect real estate price appreciation, owing to negative interest rate policy, and the strong expectations for additional monetary easing in the market will support the rally of this sector.”
His team anticipates economic growth of just 0.9 percent in the current fiscal year, or 0.6 percent if the prime minister/Abe administration decides to put off raising the national sales tax from 8 percent to 10 percent, which he considers unlikely.
“We still expect the government to go ahead with the tax hike as planned, as Abe said that he would postpone it only if the global economy shrinks like what happened in 2008–’09,” Konomi says. “However, we think that the probability of postponement is rising to more than 40 percent given the relative weakness in growth and political considerations.”
UBS’s Okino agrees. “The key driver of the decision to proceed with the tax increase is the growth outlook — which will be highly influenced by the global growth outlook — in the context of Japan’s well-documented government debt challenges,” he says. “Therefore the recent disappointing growth trajectory increases the likelihood of a delay, and the elections in July mean that an announcement in the second quarter is a distinct possibility.”
Mitsubishi UFJ’s Saji, a Hall of Famer with the longest winning streak among currently ranked analysts — this is his 15th year at No. 1 in Economics — says the government would be foolish to proceed as planned. “A further hike with no recovery of consumer spending would lead to a complete loss of momentum in economic recovery,” he contends. “It would eventually become impossible for the Abe administration to accomplish its primary goal of defeating protracted deflation.”
Follow Tom Johnson on Twitter at @tjohnson_nyc.
