More to come from Japanese equities in 2024, analysts believe

After a strong performance last year, with the Tokyo Stock Price Index (TOPIX) posting 25% in annual returns through 2023, global asset management firm Amundi has forecast continued positive returns from Japanese equities this year.

While unlikely to hit the “historical highs” of 2023, with total returns and price returns for this year hitting their highest level in more than three decades, Amundi maintains a favourable outlook for Japanese equities.

The TOPIX outperformed the MSCI ACWI index – which consists of a combination of large- and mid-cap companies across 23 developed and 24 emerging markets – by five percentage points, Amundi noted.

Amundi analysts, Eric Mijot, head of global equity strategy, and Claire Huang, senior EM macro strategist, posit three arguments in support of a positive stance on Japanese equities for 2024.

Firstly, they argue, earnings growth in Japan’s market remains attractive, forecast at a positive 7.6%. Over the last two years, the analysts noted, earnings growth was “higher than that of the US market, and was less volatile than that of Europe”.

Further, Japan’s domestic economic growth is expected to remain buoyant.

“[Domestic growth] should stabilise around its current rate (+1.6% in 2024 compared to +1.8% in 2023), while global growth should slow further (+2.4% in 2024 compared to +3.1% in 2023),” Mijot and Huang said.

However, the pair acknowledge that the 6.9% average fall in the Yen versus the US Dollar in 2023, which drove positive market performance and earnings growth, will be “difficult to replicate in 2024”.

Secondly, reforms introduced by the Tokyo Stock Exchange (namely, to ensure companies raise their corporate values, including efforts to improve price-to-book ratios) in March 2023 will continue to produce positive effects in 2024, they argued.

The reform aims to encourage companies with a price-to-book ratio (P/BV) of less than one times (1x) to ensure they implement measures to improve this by March 2025. Data shows that more than two-fifths (43%) of listed Japanese companies had a P/BV lower than 1x.

Lastly, and also driven by the TSE reforms, the Japanese market should continue its rerating.

“The end of the deflationary environment, which has long penalised the equilibrium levels of Japanese P/Es, has been a key underlying factor in performance in 2023 (77% contribution to the total return performance of the MSCI Japan),” the pair said.

“The market’s P/E has now returned to its average of the last 12 years, at around 14 time 12-month forward earnings. Wage negotiations in the spring should lead to wage rises for the second year running and that should be sufficient to confirm a scenario of an end to deflation and confirm the market’s continued rerating above its average of recent years.”

Downside risks to the market, as identified by Amundi, are mostly linked to the Yen.

“A strong comeback by the Yen, should global equity volatility increase sufficiently in 2024 to encourage the unwinding of carry trades, would weigh on the performance of Japan’s equities in local currency. It would penalise profits and, everything else being equal, slow the process of increasing inflation, weighing on valuations at the same time.”