TOKYO -- The resurgence of natural resource stocks seems to be signaling an end to excessive risk-avoidance among investors, but concerns about corporate earnings will likely keep a full recovery elusive.
"The net-loss projection was a surprise, but the stock managed to avoid a steep drop," Akira Iwasaki at IwaiCosmo Securities said Friday of Osaka Titanium Technologies. The shares opened the day ask-only after the metal company said it will incur a net loss for the year ending March 31 on an impairment charge in the polysilicon business. The stock plummeted 11% at one point, but closed down 6%. It likely was picked up as part of broader buying of resource stocks, Iwasaki said.
Resource companies and machinery builders were among the day's top gainers, while drugmakers and telecommunication service providers lost the support they previously had. Ono Pharmaceutical slid 5%, while Santen Pharmaceutical and KDDI lost 4% each. It was deja vu of sorts, as investors at one point last summer eagerly bought resource shares and unloaded telecom and pharmaceutical stocks.
That was back in late August, after the market was rocked by China's devaluations of the yuan. Investors picked up resource stocks and China-related shares that had tumbled. But lingering concerns about the Chinese economic slowdown limited the spell of buying.
The situation has changed little. Investors' risk-aversion might have eased, but the earnings outlook remains cloudy for the new fiscal year that starts next month.
"Sluggish profit growth is hurting growth of ROE," warned Hisao Matsuura at Nomura Securities. Return on equity at leading corporations will dip to 8.2% for the year ending March 31, dropping for a second straight year, he estimated. Pretax profit at major companies may even fall year on year for the first half of fiscal 2016, when the favorable impact from the weaker yen is expected to fizzle. A profit decrease would push ROE below 8%.
With such a gloomy outlook, investors likely will grow even more selective.
Mitsushige Akino at Ichiyoshi Asset Management is focusing on cash holdings. Cash-rich companies with stable earnings may give back to shareholders more than they did last year, he said, citing such defensive stocks as pharmaceutical and telecom companies. Many already have high stock prices. But profit growth and share buybacks would raise their ROEs, so they will not appear as overvalued, he said.
The NLI Research Institute's Shingo Ide is searching for companies that can boost profit without relying on a weak yen. Murata Manufacturing is leading the pack in such cutting-edge parts as surface-acoustic wave filters, which help remove phone noise and improve call quality. With such technological prowess, Murata should be able to continue lifting sales even if the yen strengthens somewhat, Ide predicts, adding that profits will stabilize.