Goldman Forecasts Japanese Equity Recovery from Mid-2009

Includes: EWJ, JPP, TYI
by: Steven Towns

In a report issued today and covered by Reuters (link to original Japanese piece), Goldman Sachs (NYSE:GS) says it sees a possible full recovery for Japanese stocks from mid-2009. On one hand, GS warns that a further slowdown in the global economy represents further downside risk for Japanese stocks given the nation’s high reliance on exports. On the other hand, corporate profits are seen recovering from late 2009 with fiscal year 2010 profits back to positive y-o-y growth.

For FY March ‘09, GS now forecasts profits to fall 12.0%, compared to 10.2% previously. For FY ‘10, GS sees profits up 6.0%, but that’s less than the 12.5% it previously estimated.

GS is not alone in its earlier assessments of Japan, noting the nation’s comparatively better ability to cope with high oil prices; however, the fact remains that Japan still exports a significant volume of oil to support its energy producing needs.

In addition, GS has previously cited the attractive valuation of Japanese stocks, with some 60% or so trading below book value and dividend yields of 1.9% exceeding the 10-year JGB of 1.5%. Although it’s true that Japanese stocks have outperformed in recent months, it’s also true that Japanese stocks are down around 25% across the board since a year ago. Stocks are down even more compared to recent years’ highs, which never touched 20,000, in the case of the N225.

So, while the perception of attractive value exists in Japan, the reality of realizing or unlocking this value remains elusive.

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