JPMorgan names top 5 Japan stocks ahead of a pandemic rebound

Published Thu, Aug 26 20217:30 PM EDT

Japanese stocks have lagged their global peers this year — but three things could help push share prices higher in late August, according to JPMorgan . While it's still too early to say that stocks in Japan have reached their peak, the catalysts could provide the perfect storm for a lift in Japanese equities, according to the U.S. investment bank. "We see three catalysts that could initiate an upward trend: (1) rise in US long-term interest rates; (2) increase in expectations for domestic economic reopening; (3) news flow related to COVID-19 treatments," Japan equity strategist Ryota Sakagami wrote in a research note. Citing progress in the U.S. where there are currently three frontrunner programs aimed at developing treatments for Covid-19, the report said: "We are starting to see a roadmap to the launch of oral treatments, with companies getting ready to provide the treatments needed to bring this pandemic to an end." As the end of the pandemic becomes more certain and expectations for a restart of the domestic economy strengthen, it will pave the way for an uptick in certain stocks, the bank said. Here are five Japanese stocks JPMorgan expects to benefit: Asahi , the food and beverage company, is set for a "top-line recovery" as countries move to reopen, following a series of cost-saving measures implemented during the pandemic. The bank has a price target of 6,200 yen on Asahi, a 19% upside from Thursday's close. Internet and media company Dentsu should benefit from its recent share buyback and the forthcoming sale of its Tokyo headquarters. JPMorgan neutral call on Dentsu and a price target of 4,000 yen, which the stock price briefly surpassed Thursday. Sony , the consumer electronics company, is expected to boost profits with the release of several major first-party games in the second half of this year. JPMorgan is overweight on Sony and set a target price of 15,800 Japanese yen — nearly 40% higher than the last close. Real estate business Mitsui Fudosan , hit by Japan's renewed state of emergency, could stand to gain from the continuing vaccine rollout and gradual reopening. The investment bank set a price target of 3,350 yen, a 34% premium from Thursday's close. Logistics company Nippon Express should be buoyed by "above expectation" air cargo volumes and increased movement once restrictions ease. With an overweight call on the stock, JPMorgan has a target price of 10,000 yen on that stock, 32% higher than Thursday's close. An overweight rating refers to stocks analysts believe will outperform the average total return of all stocks they cover over the next six to 12 months. A neutral rating refers to stocks they expect to perform in line with expectations over the same period. Why JPMorgan is bullish on Japan Japanese stocks have seesawed following a peak in mid-March as the country — currently in an extended state of emergency — continues to battle the coronavirus pandemic, fueled by the more infectious delta variant. However, much like the trend seen in Japan last year, JPMorgan said it expects stocks to start trending higher in the coming weeks. We see little leeway for them to fall further, and actually see substantial upside potential. Japan equity strategist, JPMorgan Ryota Sakagami "Japanese stock market conditions over the past three months or so look similar to conditions seen between June and October 2020," Sakagami said in the report. "But given also the market's P/E [price-to-earnings] decline to the level reached in May 2020, we expect Japanese stocks to return to an appreciation trend like the one seen from November 2020 when similar catalysts were emerging." Price-to-earnings ratio is a measure of a company's stock price relative to its earnings A low P/E ratio could mean the stock price is relatively low compared to the company's earnings. "We see little leeway for them to fall further, and actually see substantial upside potential," he said. Global recovery will benefit Japan: HSBC Separately, HSBC said Japanese companies' role in the global recovery should not be overlooked. "Japanese companies are not only beneficiaries of Asia's growth but are plugged in to key structural themes of the post-pandemic world – Asia's rising middle class, automation and robotics, and sustainability," wrote James Cheo, chief investment officer for Southeast Asia, Private Banking and Wealth Management at HSBC. "Sectors in Japan such as technology, autos, and manufacturing are already seeing improving demand."

Japan's Nikkei 225 has been the top performer this year, among large economy stock indexes in Asia and many believe that stocks in the region have more room to run in 2024.

Marco Bottigelli | Moment | Getty Images

Japanese stocks have lagged their global peers this year — but three things could help push share prices higher in late August, according to JPMorgan.