Nikkei index predictions for 2020 and beyond
The Nikkei has risen 16 per cent so far this year and there are bullish signs on the horizon, so what is the Nikkei index forecast for 2020 and beyond?
The Nikkei 225 index, often called simply the Nikkei, is the index for large companies on the Tokyo Stock Exchange in Japan, an index of the country’s biggest and best quality shares. The Nihon Keizai Shinbun newspaper has calculated its value daily since 1950.
It is constantly scrutinised, so what is the Nikkei index forecast for 2020?
Nikkei predictions for 2020
The index has risen 16 per cent this year, with most of the growth since August. Many analysts are optimistic, expecting the upward momentum to continue over the next 12 months. Others are more cautious, pointing to political and economic challenges whose effects may be felt more keenly by Japan in 2020. They warn this will increase downward pressure on the Nikkei and affect the Nikkei share price.
In terms of the Japan stock market forecast, it is important to remember that the Nikkei is different from other global measures of aggregated stocks. The index is price-weighted and reviewed annually (unlike the FTSE 100 in the UK, whose components are market-weighted, and reviewed quarterly).
According to Siblis Research, the largest sector of the index is the consumer discretionary sector, which makes up 21 per cent. The Industrial sector is second, followed by information technology, healthcare, communications, and consumer staples.
Siblis Research points out that the Nikkei 225 is unusual because it is not market cap weighted. This means that the index weightings do not represent sector market values of the Japanese stock market. Investors should bear this in mind when thinking about Nikkei price predictions.
Unlike the S&P 500, whose components are weighted based on their market value, Nikkei 225 assigns weights to its companies based on their stock price.
The other unusual aspect of the Nikkei is that it is uncharacteristically volatile for an index and has not followed the usual pattern of steady upward growth. Compare the five-year charts of the Nikkei with the S&P 500. The Japanese index has been volatile and seen sharp falls while the S&P has gradually increased in value overall, albeit with setbacks. So what does the future hold for the Nikkei share price?
Nikkei future price
For most of 2019 the Nikkei has been trading in a range of around 20,300 to 20,400, with most of the growth since late summer, thanks to optimism over the US-China trade talks and prospects for the global economy improving. The Nikkei 225 index rose 16.1 per cent from a low of 20,261.04 in August to peak at 23,520.01 in early December 2019.
Some analysts predict a very good year for Japanese stocks in 2020 as many of the country’s blue chip stocks are driven higher by a manufacturing sector revival.
According to a Reuters poll of 26 analysts, Japanese shares are expected next year to reach levels not seen in nearly three decades. The Nikkei 225 predictions look positive.
Questioned in November 2019, the analysts said a US-China trade deal and low interest rates on the dollar would help stimulate and maintain global trade.
While the US-China deal has not yet been signed, negotiators have reached the first stage. The median estimate from the 26 analysts and fund managers last month was for the Nikkei benchmark to rise 7.3 per cent during 2020 to reach 25,000 by the end of next year, according to the Reuters poll.
This compares with a closing value of 23, 934 on December 18, 2019.
The aggregated analysts’ forecast is 2.3 per cent above the Nikkei’s October 2018 peak of 24,448, its highest since 1991.
Nikkei stock analysis
The Nikkei has risen 16 per cent this year, driven by optimism over a trade deal between the US and China. If the first phase of the deal were to be formally signed, technology and manufacturing are likely to benefit, as the US would drop punitive tariffs on Chinese goods, lifting the whole Asian region.
Hiroshi Watanabe, economist at Sony Financial Holdings, told Reuters that the Japanese economy would benefit from the global economic cycle, which is starting to look up, and added that Japanese earnings per share would start to rise in 2020.
However, other experts are more cautious. Koichi Fujishiro, senior economist at Dai-ichi Life Research, told Reuters that he didn’t see the Nikkei rising above 24,000 by the end of 2020 as the Japanese economy remains weak.
Then there is the US presidential election next November, with Donald Trump fighting for re-election. If Trump decides to delay signing the agreement with China before the election, as he has threatened to do, this might have implications for the whole global economy. For investors, the Nikkei 225 analysis must factor in Trump's unpredictable pronouncements, via Twitter, on US trade and tariffs. These can move the market and can be unexpected.
Foreign investment in Japan – predictions for 2020
There are other clouds on the horizon for foreign investors. The Japanese government has recently decided to tighten reporting requirements for foreign investment in industries related to national security.
A new law next year will require foreign investors in industries such as defence, nuclear power, utilities and telecoms to report holdings that reach more than 1 per cent of a Japanese company. The current level requiring notification is 10 per cent.
This comes in response to fears that China could end up with sizeable stakes in important technology companies.
However, Goldman Sachs analysts warn that this might deter foreign investors and dampen performance in the Japanese stock market.
Nikkei price performance
The index is unusually volatile for a stock market in a developed country. The Nikkei average peaked on 29 December 1989, when it touched 38,957 during trading. By March 2009 it had fallen to just over 7,000. It rose again, then in 2011, after the earthquake in the northeast part of Japan, fell over 17 per cent, finishing the year at 8,455.
The magnitude 9 earthquake caused huge damage and loss of life, with the Japanese government estimating the damage at $199bn (£150bn, €180bn, 16.9 trillion yen). The subsequent tsunami caused a cooling system failure at the Fukushima Daiichi Nuclear Power Plant, which resulted in a level-7 nuclear meltdown and release of radioactive materials.
Despite this massive infrastructure blow, the Nikkei recovered. By 2015 it had climbed over the 20,000 mark, up 10,000 points in two years. Sceptics say much of this was due to the Bank of Japan's holding a huge proportion of Japanese exchange traded funds, which in turn hold a large proportion of Nikkei 225 constituents.
Nikkei valuation prospects
Investec’s December 2019 analysis puts the short and medium term prospects for the Nikkei as Weak Positive. Morgan Stanley, UBS and Nomura are more bullish, saying that Japanese companies are likely to have a better year in 2020. Looking at the various Nikkei 225 forecasts, and according to CNBC, the banks’ recommendations for Japanese stocks are:
• Morgan Stanley: Overweight IT and services, financials excluding banks, wholesale trade and construction; underweight food, retail, pharmaceutical and autos
• UBS: Focus on “quality companies with steady dividend payout,” firms embarking on organisational transformation, and those with sustainable and ethical business practices
• Nomura: Top picks are machinery, and electric appliance and precision instrument sectors; IT and services stocks could underperform
Overall , analysts seem to agree that the Nikkei 225 is likely to continue its upward momentum, with more gains in the coming year. Growth is unlikely to be at recent levels, however.
The coming year
Not everyone sees such positive times ahead. Bethel Loh, macro strategist at online financial broker ThinkMarkets, says 2020 could be a year of material retrenchment when Japan’s major equity benchmark could tumble to 20,000 levels.
"This would be driven by the return of economic fragility driven by a confluence of multiple external factors that most importantly starts with the Fed," he argues.
The US Federal Reserve’s interest rate policy has been a considerable, if not the most important, determinant of the Nikkei's recent direction, as investors focus on the difference between the much higher Fed interest rate relative to Japan’s lower and more stagnant interest rate.
"How this relationship tracks therefore impacts where capital flows and the strength of the Yen, and in turn, drives the outlook for Nikkei," he says.
"Historically, Yen appreciation has been strongly correlated in certain periods with weaker Japanese equities due to Japan's export status; think Sony or Honda. Japanese multinationals are hurt by the negative effect on exports from a stronger Yen. "
A stronger Yen reduces demand for Japanese products because they are more expensive in foreign currency terms and this weighs on corporate revenues. 2019 has been characterised by Yen weakness and the Bank of Japan is unlikely to make any significant short-term changes. Therefore the Fed is the unknown quantity in the future.
"It leaves Fed behaviour in 2020 as the most critical unknown and a potent driver of Yen strength – and in turn, Nikkei direction," Mr Loh says. "Should external circumstances dictate a deterioration in US-China trade and global growth continue to languish, there’s plenty of scope for the Fed to hold at best or cut at worst."
If the Yen appreciates in value, a Nikkei sell-off is likely.
This would be so even if you eschew the "smoke and mirrors of US-China trade negotiations" and the apparent resilience of the US consumer and global pause in central bank easing cycles, he says.
"The last time Nikkei was up at these levels in 2017 and 2018, the index was substantially pared back. Ultimately, it won’t take much economic fragility, which some have forecast for Q1 2020, for capital flight to take place and markets to flock back to the anti-risk Japanese Yen."
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