Investing.com -- Bank of America has lowered its year-end forecasts for Japanese equities, citing near-term headwinds and a cautious earnings outlook.
In a new Japan equity strategy note, the bank said it now expects the TOPIX to reach 2,750 and the Nikkei 225 to end the year at 38,500.
“We think the market is already near to bottoming, but expect it to remain broadly flat in Apr-Jun,” BofA analysts wrote.
While the firm anticipates a “moderate uptrend in Jul-Sep,” it said the recovery is more likely to “accelerate in Oct-Dec.”
According to BofA, “The TOPIX P/E fell to 11.2x on 7 April, implying a 12% YoY decline in FY25 earnings.”
If the U.S. enters a recession—a scenario the firm considers unlikely—“it would need to factor in at least a 20% dip,” writes BofA.
This outlook, combined with limited upside in the near term, makes “a major Apr-Jun market rally unlikely.”
BofA identified several factors that could support a rebound later this year. “A full-scale market rebound will evidently require more clarity on the outlook,” analysts said, drawing parallels to the 2018-2019 U.S.-China trade tensions.
They listed three potential catalysts: “(1) at least one country successfully striking a deal with the US; (2) market attention on US tax cuts; and (3) the release of guidance from more Japanese companies at 1Q results.”
In terms of positioning, the bank recommends focusing on stability for now. “We maintain our basic strategy of examining expanded positions in core large caps on weakness during market selloffs,” with an emphasis on “domestic demand sectors and other defensives.”
However, BofA sees opportunities ahead: “It might well prove advantageous to gradually increase portfolio beta heading into Oct-Dec.”