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Japan's Gloomy Profit Outlook Is Holding Foreigners Back

Min Jeong Lee
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Japan's Gloomy Profit Outlook Is Holding Foreigners Back

Japan's Gloomy Profit Outlook Is Holding Foreigners Back

(Bloomberg) -- It’s getting tougher to be a Japan stock bull -- what few are left of them -- with earnings estimates for Topix Index members slumping to a 15-month low this week.

The benchmark gauge’s 12-month estimated earnings-per-share fell to its lowest since February last year on Friday, according to data compiled by Bloomberg. Following a bleak earnings season where results fell short of forecasts by 15% on aggregate, it leaves optimists betting on Japan’s fundamentals on thin ice.

“If the bottoming out of earnings momentum is delayed, we believe foreign investor cash securities flow could be affected,” strategists at Goldman Sachs Group Inc. including Kazunori Tatebe wrote in a note to clients. If uncertainty over the U.S.-China trade war “were to lead to stagnation in Japanese corporate activity, then the earnings momentum recovery story could collapse.”

The export-heavy Topix has taken a beating from the re-ignition of trade tensions, falling about 5% this month, and is the worst performer this year among 24 advanced markets tracked by Bloomberg. Its fate has been closely tied to how foreigners view the market, given they own roughly one-third of it.

International investors were net sellers for a second week in the period ended May 17, after having been net buyers in April. In total, they’ve offloaded 1.04 trillion yen ($9.5 billion) of cash equities this year.

Earnings Momentum

There needs to be an improvement in global economic fundamentals and a recovery in the earnings momentum of Japanese companies before foreigners return to the market, according to Goldman.

The strategists expect companies with a domestic business focus and defensive stocks to outperform in the near term as trade frictions continue to pose a headwind. They recommend a “quality” bias and stocks with high and stable gross profit margins.

“We think a fall in equity prices on the scale seen in the fourth quarter of 2018 is unlikely,” they said. “However, neither do we think the Topix is likely to gain much ground in the near term."

--With assistance from Cormac Mullen and Christopher Anstey.

To contact the reporter on this story: Min Jeong Lee in Tokyo at mlee754@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Cormac Mullen, Teo Chian Wei

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