Political instability will continue to drive global equity markets in 2017. On a global perspective, investors will focus on what the Donald Trump administration actually brings to the table as well as potential further action by Janet Yellen as higher US interest rates will trigger capital outflows from emerging countries. A string of elections in the EU and the potential for a ‘hard’ Brexit will also sway market sentiment. In China, the 19th National Congress of the Communist Party will be held in the autumn of 2017. As this will be general secretary Xi Jinping’s second five-year term, he will likely take a hard line in foreign diplomacy in order to show his strength and secure his position.
If a long equity market rally requires a solid political basis, Japan has an advantage. Prime minister Abe’s approval rate is still high and there is no major election scheduled until December 2018. Terms for two of the members of Bank of Japan Policy Board, Mr Kiuchi and Mr Sato – who have both expressed opposition to governor Kuroda’s easing measures – will expire in July 2017. Should Abe’s cabinet choose successors more sympathetic to governor Kuroda, this could result in a unified government and central bank, with markets reacting favourably in 2017. We expect the Bank of Japan to continue its ETF purchases in 2017, which will support the market in case of a downturn.
We expect over 10% earnings growth in Japan in 2017, driven by manufacturers – including the electrical appliances, machinery and auto sectors – due not only to currency depreciation but also the recovery of global demand, especially from China. The capital expenditure demand from China hit rock bottom in early 2016 and is now on the way to recovery, and this will further accelerate in 2017. Both global and domestic demand for renewed production facilities is stable in Japan. The country’s non-manufacturers will also see almost 10% growth next year. Retail sectors will experience a recovery from the number of tourist visitors as a result of the yen’s depreciation and the construction sector will benefit from projects for the upcoming 2020 Olympic Games.
Our forecast for the Nikkei 225 is that it will test 22,000 in 2017. This is based on our forecasted earnings per share (EPS) and the average price/earnings ratio (PER) for the period from 2014 to 2016. The rebound from the so-called ‘Trump hike’ may come sometime in the first half of the year, but after that, the Japanese equity market will increase steadily based on solid corporate earnings growth.
Katsunori Kitakura is lead strategist at SuMi TRUST