London-based research boutique Longview Economics says the sell-off in Japanese equities has gone too far and recommends buying the dip. The Nikkei 225 sits 8.4% below its June 25 record close after tech names such as Kioxia sold off as the AI narrative soured, but Longview points to cheap valuations, strong earnings and improving economic data as reasons to stay overweight.
Longview Economics laid out its case for Japanese stocks in a note published Wednesday, arguing the market's pullback has created a buying opportunity rather than a warning sign. Japan's Nikkei 225 sits 8.4% down from its record closing high registered on June 25, after big technology stocks including memory chipmaker Kioxia suffered sharp pullbacks as the AI narrative soured.
Valuations and earnings support the bullish call
Harry Colvin, Longview's senior market strategist, believes the sell-off has gone too far. He argues equity markets turn attractive when they are technically oversold, carry strong upward earnings momentum, and are cheap or have recently de-rated. According to Colvin: "Japan currently ticks all three of those boxes".
Earnings growth for the Japanese market is running at some 19% year-on-year in dollar terms, Colvin notes. Meanwhile, the forward price-to-earnings ratio has de-rated over the past six months and is cheap relative to its own history.
Manufacturing and labor data point to a cyclical upturn
Japan's manufacturing cycle is also turning up. The manufacturing purchasing managers' index rose to 55.1 last Friday, close to the highest levels since Longview's records began in 2004, while the new orders index hit an 8.5-year high. Much of that strength reflects stronger capital spending tied to the semiconductor and electronics sectors, Colvin says, as overseas demand for Japanese products rises to multi-year highs.
Japanese machine tool orders are growing rapidly too, up 50.4% year-on-year, alongside a re-acceleration in America's industrial cycle. The weaker yen is providing an additional tailwind by boosting exporters' competitiveness, according to Colvin.
Japan's labor market is stabilizing and potentially starting to strengthen as well. Combined employment in manufacturing and construction grew 2.5% year-on-year in June, its fastest pace since 2014, after years of job growth concentrated in sectors tied to Japan's ageing demographic, such as healthcare and welfare.
Longview says it remains overweight Japanese equities in its strategic portfolio, titling its note "Japanese Equities: BUY The Dip."
Source: MarketWatch
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