By Ayai Tomisawa
TOKYO (Reuters) - Japanese stocks will be largely flat in 2018 and then rise over 3 percent next year, in part supported by cheap valuations, but gains will be limited by a global economy hit by trade disputes, a Reuters poll found.
This year, Japanese equities have been volatile, with foreign investors' sell-off in futures and their quick short-covering swaying the market back and forth.
Foreign investors had sold 8.5 trillion yen ($74.71 billion)of Japanese futures and cash stocks by early September, according to data from Japan Exchange Group, then bought back 2.2 trillion yen in the next four weeks, helping lift the Nikkei share average (N225) to a 27-year high of 24,448.07 in early October.
Then the market was hit by selling again, pushing the index down at the end of October to a level not seen since March.
The market has been affected by global concerns such as U.S.-China trade frictions, political uncertainty in Italy, a slowdown in the Chinese economy, the U.S. Federal Reserve's monetary policy, falling oil prices and a sell-off in emerging market currencies as well as weakening chip demand.
Japanese stocks will rise toward the end of the year and into next as cheap valuations should attract some buyers, but then they will flatline, according to median estimates from 22 analysts and fund managers polled by Reuters in the past week.
The Nikkei is expected to trade at 23,000 at year-end, the median forecast showed, up 4.8 percent from Tuesday's close of 21,952.40, The index's 2017 close was 22,764.94.
It is seen trading at 24,000 in mid-2019, and then 23,750 at end-2019 - an 8.2 percent gain from Tuesday's close.
Forecasts for mid-2019 ranged from 18,000 to 26,500. For end-2018, the range was 21,000 to 24,500. In the previous poll in August, forecasts for the end of this year stretched from 22,000 to 26,000.
Analysts said with the broader Topix's (TOPX) shares trading at 12.43 times their projected earnings, investors will likely scoop up cheap shares if their concerns diminish.
"Some of the worries will likely ease such as weakness in electronic components demand for smartphones hitting the bottom in the Oct-Dec period. Then industrial production will recover in early 2019," said Fumio Matsumoto, a senior fund manager at Dalton Capital Japan, who forecast the Nikkei to end this year at 23,000 and rise to 25,000 by mid-2019.
"Global cyclical stocks which have been pressured are expected to rebound."
GLOBAL SLOWDOWN
While market observers expect the equities market to see an improvement to a certain extent next year, worries about the global economy will probably limit the upside, they said.
The International Monetary Fund last month cut its global economic growth forecasts for 2018 and 2019, saying the U.S-China trade war was taking a toll and emerging markets were struggling with tighter liquidity and capital outflows.
"A weaker global economy will likely hurt growth in EPS, while stock market's momentum will peak out in mid-2019," said Akio Yoshino, chief economist at Amundi Japan, who expected the Nikkei to trade at 22,800 by the end of this year.
"In addition, the European Central Bank will bring its asset purchase program to an end next year and the U.S. central bank will continue raising rates."
Yoshino forecast the Nikkei to hit 24,000 in June 2019 and 23,500 in December 2019.
Market participants also said they were already worried by the expected blow to consumption from next year's scheduled sales tax hike to 10 percent from 8 percent.
"A tax hike amid weakening global economy will have a negative impact on the Japanese equities market," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley (NYSE:MS) Securities.
"Japanese stocks are likely to rally in the April-June quarter but are expected to correct in the second half of 2019."
Fujito expects the Nikkei to try 23,500 in mid-2019 but sees the benchmark index falling to 18,000 by the end of next year.
Japan's economy shrank more than expected in the third quarter, hit by natural disasters and a decline in exports.
(To read other stories from the Reuters global stock markets poll)
($1 = 113.7800 yen)
(Additional polling by Sarmista Sen and Manjul Paul; Editing by Richard Borsuk)