The Nikkei Stock Average has risen by around 16.4 per cent since the end of last year, while the Topix has risen by around 19 per cent.
But Morgan Stanley, UBS, and Nomura predicted Japanese equity may climb even higher in 2020, driven by a corporate earnings recovery.
The three banks highlighted the sectors they like in Japan, including machinery, financials, and wholesale trade.
So far this year, Japanese equities have risen by about 20 percent but also several major investors said they expect further gains in those stocks in 2020.
According to Morgan Stanley, UBS and Nomura, expected recovery in Japanese corporate earnings will drive their stock prices higher.
That comes after two consecutive years of earnings declines in Japan, due largely to a stronger yen and U.S.-China trade tensions, UBS stated.
These anticipation in Japanese stocks has resulted in a recent rally. The Nikkei 225 index rose to peak at 23,520.01 earlier this month from a low of 20,261.04 in August to 16.1 percent. Similar gains were seen in the Topix index, rising 15.7 percent around the same period from 1,478.03 to 1,709.67.
The Nikkei 225 has risen by around 16.4 percent since the end of last year, while the Topix has risen by about 19 percent. Nomura anticipated that the two indexes will climb to 25,000 and 1,850, respectively, by the end of 2020.
Earlier this month, Nomura analysts wrote in a report, “Japanese stocks have been shown to have a strong cyclical flavor, and appear likely to come into their own as expectations rise for a global economic recovery,”
Of course, Japan’s economic growth is still expected to remain sluggish one of the reasons that many investors stayed away from Japanese stocks before the recent rally.
Morgan Stanley’s economists have expected zero growth in Japan in 2020. Yet equity analysts at the bank said that the country’s “positive structural trends “such as improving corporate governance and profitability, could help Japanese stocks maintain or increase their value.
Further more, by March 2020, the U.S. dollar is expected to edge higher than the Japanese yen, Nomura said. According to the bank, this would benefit Japanese companies that generate income overseas, such as exporters.
These are the recommendations of the banks for Japanese stocks:
Morgan Stanley: IT and services overweight, finance excluding banks, wholesale trade and construction; underweight food, retail, pharmaceutical and autos
Nomura: top picks are machines and sectors of electrical appliances and sectors of precision instruments; IT and services stocks could underperform
UBS: Focus on “value companies with a steady dividend payout,” organizational change firms and those with sustainable and ethical business practices


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