Should I buy?
Summary:
- Expect further 20% downside risk.
- Meanwhile, do the homework and estimate a rough 'oversold' line for quality stocks on bargain.
- Wait for USDJPY (rapid JPY strengthening to settle)
- Check for PER/PBR, dividend yield historical bottom to assess a rough support line.
Fact:
- Nikkei225: July 11th 42,224 to 34,247 Aug 5th morning session, -18.9% major correction (even more than US equities)
- TOPIX: July 11th 2,929 to 2,374 Aug 5th morning (-23%)
Why the correction?
- July 31st: JGB rate hike announced (to 0.25% cap)
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- Valuation:
- Earnings: many index companies in Japan rely on exports / industrials so recent rapid strengthening of JPY vs USD is a negative for earnings forecasts.
Where's the bottom? Recommended action.
- TOPIX Forward PER is now below avg 14x (2013~2024 avg)
- Bottom range is around 12x so back of the envelope calculation is that we can't really say it's 'oversold' until it corrects another 14~15% (12x/14x), 29,110 Nikkei 225, and TOPIX 2,018 JPY.
- Given, share price is PER x EPS, there are some forecast EPS correction to expect for some companies, especially those with exposure to USDJPY. If we estimate roughly ~5% earnings impact due to stronger JPY (ie recent correction in stocks is partially explained by weaker future earnings) we need to add this portion to the valuation side downside. So very rough est is 20% downside. Nikkei 225: 27,400, TOPIX: 1,900
- If JP equities continue to correct towards this bear case, that would offer a chance to add some position of quality stocks at a historically low valuation.
Bear case Nikkei 225 is basically wiping out entire returns sine 2023.
What it takes for JP equities to reverse?
-7.9% USD basis Nikkei 225
- Once JPY strengthening slows down or settles, the correction will likely slow down simultaneously.
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