Nikkei back above 30,000 for the first time in 30 years
The Nikkei 225 and TOPIX Price Indices have both hit 30 year-highs reaching 30,467.75 and 1,965.08 respectively on 16 February 2021[1]. The performance comes against a backdrop of strong corporate earnings growth. Earnings results for the last quarter beat expectations with companies listed on the Tokyo Stock Exchange 1st Section enjoying double-digit year-on-year operating profit growth. This growth was driven by manufacturers capitalising on a return of demand and taking rigorous cost-cutting measures to cope with the pandemic. |
While improvements in earnings revisions have helped the TOPIX index to extend its winning streak, the 12-months forward price to earnings ratio remains around 18X (figure 1).
Source: Thomson Reuters Datastream, SMBC NIKKO
Data as at 15 February 2021. Note: EPS is 12-month forward forecast based on I/B/E/S consensus.
The growth in corporate earnings is expected to continue this year as the economy re-opens. Given its relatively large exposure to the capital goods sector, Japan should also benefit from a resumption in capital expenditure plans, which have been delayed during the pandemic. The strength of Japan’s recovery is shown in chart 2. During the final 3-months of 2020, seasonally adjusted real GDP increased by 12.7% quarter-on-quarter beating market expectations. As a result, of this strong growth, Japan’s recovery from the pandemic is the fastest among major developed economies (figure 2). |
Source: CEIC, Invesco; Data as at 31 December 2020
The reopening of the economy and an increase in demand for goods has led to a rise in consumer spending and net exports, which in turn have contributed to the robust GDP growth. A pick-up in capital expenditure for the first time since the pandemic began was also supportive. However, Japan’s decision to declare a state of emergency from the beginning of January, means that negative growth is expected in the current quarter. That said, the decline should be moderate given that 1) the lockdown measures are less restrictive than during the first state of emergency 2) global demand for goods remains robust and 3) capex demonstrates awaited recovery. From a long-term perspective, progress in corporate governance reform should also help to underpin Japanese equity performance. This spring, the second revision to the Corporate Governance Code (CGC) is scheduled. The focus will be on tackling parent-subsidiary listing, cross-shareholdings, and capital efficiency issues among listed companies. The Tokyo Stock Exchange also plans market reforms in April 2022, adopting the revised CGC for the governance criteria. Corporate governance reform continues to progress, leading to improvements in capital efficiency and profitability in Japan. |
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All data is as at 16 February 2021 unless otherwise stated.
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