Investing.com– Japanese stocks have lagged global peers in recent months due to increasing political uncertainty in the country and an uncertain outlook for the Bank of Japan. But Japanese stocks are attractively valued, according to Citi analysts.
Citigroup said Japanese markets were poised to rebound through the turn of the year, with solid performance despite increased political uncertainty and the weaker and relative resilience of the Japanese economy driving the trend.
“With valuations no richer than historical averages, Japanese companies appear to be increasingly attractive (price-to-equity ratio) relative to global equities,” Citi analysts wrote in a note.
While they predicted a year-end rally in the Japanese market, they also pointed to the possibility of strong guidance hikes by major companies.
Citigroup said a easing outlook for the U.S. economy and falling global interest rates are also expected to boost Japanese stocks, and while a narrowing interest rate differential could eventually support the yen, it is unlikely to prevent a year-end rally. Even if the performance outlook for the second half is bright, it is unlikely that the Japanese market will shrink.
The Japanese index exceeded 42,000 points in July, hitting an all-time high. However, the index has struggled to reach these levels, especially as the Bank of Japan began raising interest rates.
Although the BOJ reiterated its plans to ultimately raise interest rates further at its latest meeting, investors were left wondering how much room the BOJ has to keep raising rates given Japan’s uncertain political outlook.
The coalition led by the ruling Liberal Democratic Party lost parliamentary seats in recent elections. The Liberal Democratic Party will now have to seek coalitions with smaller regional parties, which could potentially undermine its ability to enact sweeping policy changes.
Japanese stocks have rallied on this outlook, especially as the yen has fallen sharply since the election. It also surged this week after Donald Trump won the 2024 U.S. presidential election, sparking a strengthening dollar and hitting the yen.
