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Macro Alerts

Japan Inc delivers—25% earnings growth possible in fiscal year ending March 2018

09 Nov 2017
Jesper Koll, Senior Advisor to WisdomTree


The message from the current corporate results season is straightforward: Japan’s corporate earnings power continues to rise. This is due to both higher top-line sales growth as well as positive tailwinds from the exchange rate. Going forward, corporate guidance remains conservative, which in turn makes further upward revisions likely over coming quarters. All said, we maintain our call for 25% EPS growth in the current FY3/2018 (fiscal year ending March 2018), against the 13% now implied by the consensus. If realised, this implies a TOPIX level of 2,000 as a reasonable target over the coming six months, in my view.

 

Specifically, corporate guidance—which is closely followed by Japanese analysts—is still based on the assumption that sales will rise 3.2% and the exchange rate against the Dollar will average Y110/$. With this, TOPIX earnings should rise 13.1%. This is conservative because so far this year—which is April to October, as Japan’s fiscal year starts in April—sales growth has averaged 4.5%, which on its own should add almost 15% to profits if maintained in the second half of the year. 

 

On FX, the base-line assumption of Y110/$ compares to a realised average of Y111.9/$ so far this fiscal year. Every Y1 of Yen weakness basically adds back about 1% to profits, thus adding additional momentum for positive earnings growth surprises from here.

 

The following matrix aims to pull it all together. It shows the implied fair-value TOPIX level given various combinations of sales growth and FX assumptions. The current consensus is highlighted in blue—with FX at Y110/$ and 3% sales growth, the implied EPS should come to 112, which in turn puts today’s TOPIX on a multiple of 16x earnings. Note that throughout “Abenonmics,” the TOPIX PE fluctuated between 19x and 13x.

 

Sources: WisdomTree, Bloomberg, as of 31/10/17.

 

All said, I maintain my bullish call for Japanese equities: valuations are attractive and positive earnings momentum is poised to keep going. Japan is not a “value trap.” In my view profits can rise 25% in FY3/2018 which in turn suggest TOPIX at 2,000 is a reasonable fair-value target. 

 

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The views expressed in this blog are those of Jesper Koll, any reference to “we” should be considered the view of Jesper and not necessarily those of WisdomTree Europe.

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This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

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