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Japanese companies are beating analysts’ earnings expectations by the widest margin in almost three years, adding to the appeal of local stocks at a time when brokers are expecting a return of foreign investors after heavy selling.

With most Topix-listed companies except for some large financials having reported, earnings per share for the latest quarter have exceeded analyst estimates by 34% in aggregate, according to data compiled by Bloomberg. That’s the largest beat since the last period of 2017, and better than the 17% positive surprise posted by S&P 500 firms and the 6% margin for stocks in the MSCI AC Asia Pacific Index.

"Despite significant sales and profit declines year-on-year, 2Q results have tracked notably above consensus estimates, with positive surprises exceeding negative ones, especially in cyclical sectors such as automobiles and machinery,” Goldman Sachs strategists led by Kathy Matsui wrote in a Tuesday note.

Toyota Motor Corp. and Honda Motor Co. both substantially surpassed quarterly predictions and more than doubled their full-year outlooks, showing strong rebounds from coronavirus-related disruptions in the auto industry. Machinery-makers including Komatsu Ltd. and Kubota Corp. joined in on the "beat and raise” pattern as well.

The Goldman strategists said results for the latest quarter so far have "confirmed the bottoming of earnings momentum.” Earnings per share for the full fiscal year ending March 2021 are likely to dip 9.9% before rebounding to growth of 58.4% in the following year, they said.

Helped by the strong domestic results as well as hopes for an end to the pandemic and a rebound in the global economy, the 225-issue Nikkei average is trading at over 25,000 for the first time since 1991.

The rally has occurred largely in the absence of foreign investors, who have sold a net ¥8.7 trillion ($83 billion) worth of Japanese stocks and futures this year. They’ve begun to show signs of renewed interest, however, buying about $10 billion in the week ended Nov. 6, the most since October 2019.

Matsui’s team anticipates additional foreign inflows in 2021 given the potential for further corporate reform and Japan’s high weighting of cyclical stocks amid expectations for a global cyclical recovery. Goldman has raised its targets for Japanese equities, and now sees the Nikkei 225 reaching 27,200 in the next 12 months.

SMBC Nikko, which had the highest targets for Japanese stocks among brokerages in the latest poll by Bloomberg, is bullish on earnings and the return of overseas investors as well.

"The number of positive surprises in first-half results has been greater than expected, so gains in earnings revision should accelerate and we expect more funds to flow in from overseas,” strategists led by Masashi Akutsu said in a note this week.

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