Strategists are coming around to the idea that Japan is the place to be in 2017, with Morgan Stanley the latest to embrace one of the year's biggest comeback stories at the expense of America's aging bull market.
Morgan Stanley joins Japan's largest brokerage, Nomura Holdings Inc., in saying that the country's bull run will continue into 2017 and recommends selling U.S. shares to fund the trade. It's a dramatic turnaround after investors fled one of the worst performing markets earlier this year as traders lost faith in Abenomics. The Topix index has rallied for a 12th straight day to the highest level since January.
"The gains in a plausible bull case look larger than before, fueled by the prospect of fiscal expansion, rising earnings and a return of true animal spirits," according to a 43-page report dated Nov. 27 from the U.S. bank's cross-asset strategy team led by Andrew Sheets.
It's that time of the year when investors and analysts dust off their crystal balls and prognosticate on the direction of a multitude of securities. Japan's Topix may climb as much as 24 percent in 2017 as earnings-per-share expands faster than any other region in the world, according to Sheets.
Norikazu Akedo, a senior managing director at Nomura's brokerage unit, predicts the Nikkei 225 Stock Average will rise as much as 14 percent above Friday's close of 18,381.22, according to a forecast issued Nov. 18.
Morgan Stanley's position on Japan is part of the firm's broader strategy to cut credit exposure and sell equities in the U.S. and emerging markets, a reversal of its previous advice. Investors should also buy shares in Europe, where earnings are seen recovering, said Sheets. He's keeping more in cash and telling clients that volatility in markets over the next three months may require investors to act even faster than usual.
"Japan becomes our top market, with attractive long-run valuations, some cyclical strength" and good earnings growth prospects, according to the U.S. bank.
