Japan stocks (Nikkei 225) most attractive in Asia – AllianceBernStein

The Nikkei 225 index continued its remarkable comeback on Monday as investors continued allocating their capital to the country. The index, which tracks the biggest companies in Japan, jumped to £33,000 on Monday, the highest level since August 2nd. There are signs that investors are eying the year-to-date high of £33,796.

Most attractive opportunity in Asia

The Nikkei 225 index has outperformed some of its biggest international peers like the S&P 500 and Dow Jones. It has risen by over 30% and is now hovering near its highest level in more than 30 years.

There are several drivers for the blue-chip Japan index. For example, most analysts believe that Japan stocks are significantly undervalued compared to its peers. It has a trailing PE ratio of 18.5x compared to S&P 500’s 23x. 

Second, the weaker Japanese yen has made the index relatively attractive. The USD/JPY pair was trading at 146 on Monday, ~14.75% above the lowest level this year. It has jumped by more than 30% from its 2022 lows. A weaker yen leads to more profits for large Japanese companies that do a lot of business abroad.

Third, analysts believe that many Nikkei 225 index companies will be forced to boost their share prices by dividends and share buybacks. This is driven by a decision by the Tokyo Stock Exchange to force firms trading below their book value to boost their share prices.

And in a statement on Monday, David Wong, a strategist at AllianceBernstein, cited Japan’s earnings growth and valuations. He argued that the earnings momentum and corporate reform made it the most attractive market in Asia.

Still, Japan companies are facing numerous challenges. Many of them have an exposure to China, a country that is slowing dramatically. Additionally, there are concerns about monetary policy changes in Japan as inflation steadies.

Nikkei 225 index forecast

Nikkei chart by TradingView

The daily chart shows that the Nikkei 225 index has been in a strong bullish trend in the past few months. This rally started in March 2022 when it settled at ¥24,659. 

The index has managed to flip the important resistance level at ¥30,782 (September 2021 high). It has now moved above the 50-day and 25-day moving averages. The Relative Strength Index (RSI) has moved above the oversold level.

Therefore, the outlook for the index is bullish, with the next key resistance level to watch being at ¥33,796. The stop-loss to watch will be at ¥32,000.