The world's most expensive stock index will plunge 50%

The world's most expensive stock index will plunge 50%

June 1 (Bloomberg) -- The steepest rally in the Topix index in 56 years has turned Japanese stocks into the world’s most expensive equities. Not for long, say hedge-fund managers betting the recession will prevent earnings from rebounding.

Bridgewater Associates Inc., Highbridge Capital Management LLC and Farallon Capital Management LLC, which together oversee almost $80 billion, increased bets against Japanese companies in the past three months, filings to the Tokyo Stock Exchange show. The Topix climbed 30 percent in the same period, the most since 1953, and shares in the index trade at an average 41.2 times estimated earnings, the highest level among the 40 largest markets, data compiled by Bloomberg show.

Bullish investors say Japanese stocks, which have recovered 44 percent of the losses that followed the collapse of New York- based Lehman Brothers Holdings Inc. in September, will rise further because analysts predict earnings will rebound the most since 2000. Bears point to forecasts by economists that show Japan will contract twice as much as the U.S. this year.

“Investors are anticipating a strong earnings recovery in 2010, but it’s really doubtful,” said Kazuyuki Terao, a Tokyo- based manager at the Japanese unit of Allianz SE, which oversees $1.6 trillion. “The markets have gotten ahead of themselves.”

The Topix rose 1.6 percent to 912.52 today, while the Nikkei 225 Stock Average advanced 1.6 percent to 9,677.75. Last week, the Topix gained 2.5 percent, while the Nikkei 225 climbed 3.2 percent, rounding out a third consecutive month of gains.

Higher Valuations

Japanese valuations dwarf those of companies in the Standard & Poor’s 500 Index, which traded at an average 16.1 times earnings, based on 2009 estimates as of last week. Stocks in the Topix were also more than twice as expensive as shares in China, Hong Kong, Australia and South Korea, and traded at about three times the valuations for Germany’s DAX Index, the U.K.’s FTSE 100 and France’s CAC 40, data compiled by Bloomberg show.

A decline to the average valuation during the past five years of 21 times earnings would drive down the Topix by about half its value, according to data compiled by Bloomberg.

The 1,703 companies in the Tokyo Stock Exchange’s first section, where the biggest Japanese corporations list, are forecast to earn an adjusted 22.1 yen (23 U.S. cents) per share this year, based on share-weighted analysts’ estimates compiled by Bloomberg. In 2008, they lost 12.99 yen a share.

Lost Decade

Japan’s economy shrank at a 15.2 percent annual rate in the first quarter, the most since data began in 1955. Gross domestic product will drop 6.7 percent in 2009, according to the median forecast of 11 economists compiled by Bloomberg. That’s more than twice the 2.8 percent contraction projected for the U.S. in another survey of 61 economists.