Nikkei faces correction before gains next year

28 Dec, 2020

TOKYO: Japanese shares will likely see a correction in the near term following a global rally fuelled by coronavirus vaccine hopes, but will rise next year to their highest levels in three decades, a Reuters poll published, recently weekday showed.

The median estimate in the poll of 26 analysts and fund managers surveyed Nov. 12-23 put the benchmark Nikkei index finishing 2020 at 26,000.

That is slightly below the index’s close on Tuesday of 26,165.59, but nearly 12% higher than the previous Reuters poll in August that forecast the index at 23,300 at year’s end.

The median forecast in the poll expects the Nikkei to remain at 26,000 by next June before rising to 27,350 at the end of 2021, which would be its highest level since August 1990.

On Tuesday the Nikkei marked its highest close since May 1991, joining a global equity rally boosted by a wave of promising developments on coronavirus vaccines.

“Stock prices have been overheated, globally. Considering the recent novel coronavirus infections, some upcoming economic indicators will be inevitably worse,” said Hiroshi Namioka, strategist and fund manager at T&D Asset Management.

“As a result, we predict there will be a revision of forward EPS estimates and a correction in overvalued stocks,” he said.

Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank, also warned the overheated market is “overly pricing in hopes that are far from the real economy.”

The Nikkei has surged to levels unseen since the collapse of the bubble economy and is up more than 13.8% this month, even though the world is seeing another wave of infections.

Rising coronavirus cases in several parts of Japan prompted the Japanese government to pause its domestic travel campaign in the cities of Osaka and Sapporo on Tuesday.

Still, some analysts are optimistic stocks will continue to trade near three-decade highs until the end of 2021, on expectations central banks will continue to pursue their easing monetary policy to support pandemic-battered economies.

“The US Federal Reserve is currently speculated to further loosen its monetary policy amid another coronavirus wave. This could result in a ‘money glut’ market and push Japanese stocks higher from year-end to spring next year,” said Hiroshi Watanabe, economist at Sony Financial.—Reuters

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