Japan Stocks: Market Forecast for the First Half of 2024 and Notable Stocks (Industry) Report

In this report, we will introduce market forecasts for the first half of 2024 and notable stocks (industries) of Japanese stocks. We do not show any recommendations or trading guidelines for the stock examples mentioned in this report. Based on the situation that may occur in Japan and the US in the 2024 market price, I would appreciate it if you could focus on industries that are likely to be affected and why.

The trend in US stocks will continue to spread to Japanese stocks.

Of particular interest is the US presidential election to be held on November 5 this year.

Centering on the S&P 500, we have data that is likely to increase stock prices in the year of the US presidential election.

Even in recent years, when President Trump was elected in 2016 and when President Biden was elected in 2020, both stock prices have increased significantly since then.

However, turbulence also occurred along the way.

2016 was a shock caused by the unexpected withdrawal of the United Kingdom from the EU in June, and in 2020, the stock market crashed drastically due to the novel coronavirus pandemic in March.

Also, from September to October, which is just before the election, the stock market is likely to become unstable due to risk aversion movements.

Precisely because stock prices continued from the beginning of the year to March 2024, there is also a lot of room for decline when bad news comes out.

Let's assume that there will be some kind of turbulence until the presidential election, and that it should be appropriate.

Interest rate cuts can be mentioned as another important topic for US stocks.

The FOMC (Federal Open Market Committee) in March predicted three interest rate cuts by the end of the year.

4/30, 5/1, 6/11, and 6/12 are left for the FOMC for the first half of 2024.

Theoretically, interest rate cuts lead to higher stocks. However, the current market already incorporates this and has a strong upward trend, and by the time interest rate cuts become a reality, we have to be careful about sales due to running out of materials. In particular, the CPI (consumer price index) has not fallen to the 2% range compared to the previous year, which is said to be the proper line, and prices are still high, so why is the Fed trying to cut interest rates?

This is the author's guess, because the current economic environment is rapidly deteriorating as prices and stock prices progress.

Prices are rising but the economy is bad = it seems that they are considering cutting interest rates at an early stage to prevent stagflation. Also, since economic deterioration will reduce the future profits of companies, when it comes to a head, there is a possibility that stock depreciation will occur due to uncertainty about the future.

However, if interest rates are cut while price increases have not stabilized sufficiently, there is a risk that inflation will be re-induced in the long run. In that case, the state of even higher prices and higher interest rates will continue, and it will be necessary to select industries and stocks that can be used as a tailwind.

The financial results season in May can be cited as a major milestone for Japanese stocks in 2024.

Most of the large stocks used in the Nikkei Stock Average will have their financial results announced in May, and the “outlook for the next year” will be announced along with one-year results.

While many companies will hit record highs in 2023, the following year will be a hurdle where that high profit is high.

If the outlook deteriorates against that hurdle, it will be more than a few factors that cause stock prices to rise and fall.

In fact, the same thing happened in May 2021. At that time, corporate performance was recovering in a V-shape after the economy fell due to the novel coronavirus, but financial results were not evaluated, and Japanese stocks fell one after another.

Stocks that were doing great at the time, such as 9984 SoftBank Group and 6594 Nidec (now Nidec), plummeted across the board, leading to a slump over the past few years.

This year's Japanese stocks also rose significantly until March, so I want to be more nervous than usual about the May financial results.

Also, the recent appreciation of Japanese stocks is still greatly affected by the depreciation of the yen.

If you look at the average EPS (profit per share) of companies that have adopted the Nikkei Stock Average, it has risen year by year to the 2300 yen range.

Since 2020 was around 2000 yen, it means that corporate performance has increased by about 15%.

However, if you look at this in dollars, the landscape changes.

The Nikkei average EPS in dollar conversion as of 2020/6 is 18 dollars. The exchange rate at that time was 1 dollar = 109 yen (20/6/1). Meanwhile, the same EPS as of 2024/3 is approximately $15 to $16 in dollar terms.

Even if it is rising on a yen basis, it is rather declining in dollar terms. EPS is being boosted on a Japanese yen basis due to the depreciation of the yen over 150 yen. Although it changes depending on individual stocks, profits of Japanese companies in foreign currency are flat or sluggish, but they are rising when viewed on a yen basis due to currency depreciation.

Hypothetically, if the depreciation of the yen does not progress any further or turns in the direction of appreciation of the yen, the current boosting effect will decrease. Based on these points, when investing in Japanese stocks in the future,

I think it is necessary to focus on investing in companies (industries) as described above.

I would like to think of bank stocks as one of the main Japanese stocks, even in the medium to long term.

・The point that interest rate hikes, which are a boost to the banking business, are likely to continue

・The fact that people's money is actively flowing into investment due to the new NISA

・The fact that global capital has escaped from China, and Japan's financial presence is relatively increasing

・The point that corporate performance is improving due to currency depreciation

As a result of the above situation, the environment for bank stocks has never been better.

Even in terms of bank business, operating profits have improved due to recent stock appreciation, and profit efficiency is progressing by proceeding with the consolidation of stores.

Also, as of 2024/2, the average PER for the banking industry as a whole was 9.3 times. In a situation where there are many stocks where PBR is split by 1 times, there is a lot of room for theoretical stock price increases compared to other industries.

Japan broke away from deflation due to the depreciation of the yen and global price trends and entered an era of inflation.

In March this year, the Bank of Japan lifted its negative interest rate policy, which had continued for 8 years. This is expected to improve profit margins in the banking industry.

As a caveat with bank stocks, stock prices have already risen significantly, so it probably cannot be treated as a high dividend stock with undervalued value like before.

I think it is necessary to change the way we look at it not as a value stock, but as a growth stock associated with growth in business performance.

Since it is a growth stock, the range of price movements is large. When the market deteriorates, I think 20% to 30% will drop smoothly from high prices. However, in the medium to long term, the banking industry has a tailwind environment, so it is necessary to pick up on such situations while being prepared for the magnitude of volatility.

Typical examples3 major megabanks

Regional bank stocks tend to be seen as having low growth potential due to regional ties, but there are also regional banks where population growth and trade area expansion can still be expected depending on the region where the business is being developed.

While it has 469 domestic locations, mainly in Kyushu, and 8 overseas locations, mainly in Asia, it is the second-largest in Japan in terms of total assets of regional banks.

Furthermore, we are advancing digital transformation (DX) strategies ahead of time, such as having the “Bank for Everyone,” which is the first digital bank in Japan.

Dividends are scheduled to be increased for 3 consecutive terms as of the fiscal year ending 2024/3, and dividends were not reduced in fiscal 2020 due to the novel coronavirus disaster. From 2024 onwards, we have set medium- to long-term targets to raise ROE (return on equity) to 8%, and shareholder return measures such as improved profitability and share buybacks are expected.

Although it spans multiple industries, infrastructure renewal in Japan has become an important medium- to long-term theme.

Roads, bridges, and water pipes were built during the period of rapid economic growth from the 1960s.

According to the Ministry of Land, Infrastructure, Transport and Tourism's tally, infrastructure that has passed 50 years or more since construction accounted for 30% as of 2020, and there will be a further upward trend in the future, and there is an urgent need for repair and maintenance.

In an age of population decline, it is not reasonable to prepare infrastructure in every corner of Japan as before.

However, even so, there are many necessary infrastructure renewals, mainly in major cities, and even if construction unit prices rise due to soaring material prices, etc., we have no choice but to use money as necessary expenses.

The trading partners are also government offices and local public bodies, so earnings are stable.

Also, there are many high-dividend stocks with high value, such as PBR splitting by 1 times for stocks of these companies responsible for repairs and construction.

The company, which is an engineering company specializing in bridge construction and maintenance, is involved in contract work for the investigation, design, manufacture, erection, and repair of bridges, steel frames, etc. We also produce PC concrete and assemble structures.

The company's business scope is broad,

It spans a wide range of topics, etc.

We have a track record of participating in large-scale projects representing Japan, such as the Tokyo Gate Bridge, the Kurushima Kaikyo Bridge, the Akashi Kaikyo Bridge, and the Tokyo Bay Aqua Line in the bridge construction field, where we have particular strengths.

A medium- to long-term management plan until 2026 has been announced, and plans have been shown to allocate funds to growth investments while aiming for a certain amount of capital expansion.

Specifically, we expect EBITDA (profit before interest payment and before amortization) for the period to be approximately 40 billion yen, and we plan to allocate approximately 180 to 20 billion yen for growth investments based on this income. For the remainder, the total return ratio is set at 60%, and the policy is to maintain and expand returns using this as a guide.

In global inflation trends, money flows strongly to commodities in particular. Steel is one of them.

Steel is easily influenced by market prices, but if prices rise strongly, it is easy to benefit from it.

Looking at the steel industry as a whole, demand for construction of infrastructure, buildings, etc. is increasing around the world. In particular, in addition to population growth, global companies have withdrawn from the Chinese market, and supply chain restructuring is progressing.

It is the largest steel manufacturer in Japan and is ranked 3rd in the world.

The steel industry mainly produces steel bars, steel plates, steel pipes, transportation industry equipment, special steels, secondary steel products, pig iron/steel ingots, titanium, etc., and has a track record of ranking 4th in the world in terms of crude steel production volume.

We have a large steel mill with total assets of 10 trillion yen and equivalent to 1,700 Tokyo Domes, but this also led to an oversupply of steel, and we recorded a final deficit of 431.5 billion yen, which is the largest ever, in the fiscal year ending 2020/3.

As a result of a subsequent review of the management strategy, the number of blast furnaces from 15 was reduced to 10 to reduce costs. In exchange, we are concentrating on the production of high-grade steels such as ultra-high tensile steel sheets, electromagnetic steel sheets, highly corrosion-resistant seamless steel pipes, and materials for high-pressure hydrogen.

Furthermore, by carrying out restructuring and price increases at the same time, a final profit of 637.3 billion yen was recorded in the fiscal year ending 2022/3, and a V-shaped recovery was achieved in 2 years. This business continues to expand further, such as proceeding with the establishment of a subsidiary of US Steel, a major US steel company in 2024/2.

Recently, however, it has been sluggish due to falling demand and deteriorating profits in the Asian market. Also, with regard to dividends, the “consolidated dividend payout ratio is estimated at around 30% per year,” and it is expected to rise or fall according to business results, so be careful.