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Japan's stock markets are "oversold and unloved" — the opposite of U.S. equities, said Morgan Stanley, predicting that the Topix may jump as much as 15% by June 2020.
In a report issued this week, the investment bank said that Japan "has rarely been cheaper."
"In a number of respects Japan is the opposite image of the US; it is tactically oversold and unloved while average relative valuations are at all-time lows," the report said.
Japan's Topix has slumped about 14% compared to a year ago, while the Nikkei 225 has declined by about 6.5%. In comparison, the S&P 500 is 5.65% higher compared to a year ago and the Nasdaq Composite is up nearly 12% in the same period.
In fact, the S&P 500 and Nasdaq reached record highs earlier this year, after stronger-than-expected quarterly profits from some of the largest publicly traded American companies.
While European equities are also undervalued, Morgan Stanley favors Japan over Europe. The report said that the auto tariffs the U.S. might impose could "tip investor sentiment towards Japan rather than Europe for investors looking to rotate into the cheaper parts of the global market."
"Although Europe and Japan can both be classified as being both unloved and undervalued, we prefer the latter as we feel that it offers a better potential earnings and profitability story and more compelling undervaluation," it added.
Worries about Japan's economy have grown as its exports and factory output have been hit by China's economic slowdown and the escalating U.S.-China trade dispute.
But the bank painted a rosy outlook for corporate earnings, and said that any improvement in China's economy could also be good news for Japanese companies.
"We also think that the profitability outlook ... for Japanese companies is on a structurally rising trend," the report said. "More tactically, earnings revisions should be sensitive to an improvement in China growth data while any potential deferment to the consumption tax hike would also likely lift economic and earnings growth expectations if it were to happen."
Japan's sales tax hike has already been postponed twice, amid increasing weakness in the economy.
Raising the sales tax rate is considered important for Japan to rein in its huge public debt, which is twice the size of its economy. The country also faces the rising cost of financing welfare for a rapidly aging population.
"We continue to (be overweight) Japan, which is the cheapest major market versus history and peers," said the Morgan Stanley report. The "overweight" rating is an indication that it expects a stock or index to outperform its peers.
On the other hand, the bank is "underweight" on the U.S., due to "peaking margins and excessive valuations."
— Reuters contributed to this report.