Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

Toyo Seikan Group Holdings L / Index Rebalance

Nikkei has just announced the changes to the <a href="https://www.smartkarma.com/entities/nikkei-225" target="_blank" data-smartkarma-citation="entities:22909:1" rel="noopener">Nikkei 225 (NKY INDEX)</a> as part of its periodic review. The changes will be made prior to the open of the market on 1 October, so passive funds will trade at the closing auction on 30 September.There are 3 changes to the index with <a href="https://www.smartkarma.com/entities/keyence-corp" target="_blank" data-smartkarma-citation="entities:3077:1" rel="noopener">Keyence Corp (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/murata-manufacturing-co-ltd" target="_blank" data-smartkarma-citation="entities:11649:1" rel="noopener">Murata Manufacturing (6981 JP)</a> and <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a> replacing <a href="https://www.smartkarma.com/entities/nisshinbo-holdings-inc" target="_blank" data-smartkarma-citation="entities:10561:1" rel="noopener">Nisshinbo Holdings (3105 JP)</a>, <a href="https://www.smartkarma.com/entities/toyo-seikan-group-holdings-l" target="_blank" data-smartkarma-citation="entities:11858:1" rel="noopener">Toyo Seikan Group Holdings L (5901 JP)</a> and <a href="https://www.smartkarma.com/entities/sky-perfect-jsat-holdings" target="_blank" data-smartkarma-citation="entities:14097:1" rel="noopener">Sky Perfect Jsat (9412 JP)</a>.While the inclusion of <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a> and the deletion of <a href="https://www.smartkarma.com/entities/sky-perfect-jsat-holdings" target="_blank" data-smartkarma-citation="entities:14097:1" rel="noopener">Sky Perfect Jsat (9412 JP)</a> was expected, the other names are relative surprises.The impact on the inclusions is not very high in terms of days of ADV to buy and in terms of the real float to buy, but the impact on the deletions is a lot higher. The selling on <a href="https://www.smartkarma.com/entities/nisshinbo-holdings-inc" target="_blank" data-smartkarma-citation="entities:10561:1" rel="noopener">Nisshinbo Holdings (3105 JP)</a> and <a href="https://www.smartkarma.com/entities/toyo-seikan-group-holdings-l" target="_blank" data-smartkarma-citation="entities:11858:1" rel="noopener">Toyo Seikan Group Holdings L (5901 JP)</a> will result in around 18% of the free float of the stock being sold and the stocks could drop a lot before investors start to get involved.This is the first review post the market consultation that was announced in May and the conclusions of which were published in July.As usual, Nikkei have ignored the sector balance that is spoken about so much in the index methodology. Apparently its easier to write the index methodology than to follow it!

Nikkei has just announced the changes to the Nikkei 225 (NKY INDEX) as part of its periodic review. The changes will be made prior to the open of the market on 1 October, so passive funds will trade at the closing auction on 30 September.There are 3 changes to the index with Keyence Corp (6861 JP), Murata Manufacturing (6981 JP) and Nintendo Co Ltd (7974 JP) replacing Nisshinbo Holdings (3105 JP), Toyo Seikan Group Holdings L (5901 JP) and Sky Perfect Jsat (9412 JP).While the inclusion of Nintendo Co Ltd (7974 JP) and the deletion of Sky Perfect Jsat (9412 JP) was expected, the other names are relative surprises.The impact on the inclusions is not very high in terms of days of ADV to buy and in terms of the real float to buy, but the impact on the deletions is a lot higher. The selling on Nisshinbo Holdings (3105 JP) and Toyo Seikan Group Holdings L (5901 JP) will result in around 18% of the free float of the stock being sold and the stocks could drop a lot before investors start to get involved.This is the first review post the market consultation that was announced in May and the conclusions of which were published in July.As usual, Nikkei have ignored the sector balance that is spoken about so much in the index methodology. Apparently its easier to write the index methodology than to follow it!

Nikkei 225 Index Rebalance: Nintendo, Keyence, Murata IN; Nisshinbo, Toyo Seikan, SKY Perfect OUT

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Wisdomtree Japan Hedged Eq / Technical Analysis

Market dynamics continue to send mixed signals, but the bottom line is that not one MSCI ACWI Sector is breaking down, and important price support levels are holding in the US, Europe, and Japan. Additionally, the MSCI ACWI, ACWI ex-US, and EAFE indexes all remain above critical support levels. Until supports start to break we cannot be bearish. It is also worth noting that various indicators could be making a turn for the better, including early signs of interest rates bottoming in the US and Germany, a potential false breakdown in crude oil, and high yield spreads leveling-out.

Market dynamics continue to send mixed signals, but the bottom line is that not one MSCI ACWI Sector is breaking down, and important price support levels are holding in the US, Europe, and Japan. Additionally, the MSCI ACWI, ACWI ex-US, and EAFE indexes all remain above critical support levels. Until supports start to break we cannot be bearish. It is also worth noting that various indicators could be making a turn for the better, including early signs of interest rates bottoming in the US and Germany, a potential false breakdown in crude oil, and high yield spreads leveling-out.

Critical Supports Holding in the US, Europe, & Japan; Buying Health Care, Utilities, Materials, Tech

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

Keyence revenue growth surprised to the upside like peers with a 10.7% positive surprise vs. consensus. Just as importantly, OPM was also strong as the unusually high SG&amp;A burden the company has been experiencing over the last two years continues to ease.

Keyence revenue growth surprised to the upside like peers with a 10.7% positive surprise vs. consensus. Just as importantly, OPM was also strong as the unusually high SG&amp;A burden the company has been experiencing over the last two years continues to ease.

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

On Friday 11 June, the TSE published its final revisions to the Corporate Governance Code which had been undergoing review by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code and subsequently comment for the past many months. The new Code went into effect as of 11 June. The first revision to the Guidelines for Investor and Company Engagement were published as well. The new version of Japan's Corporate Governance Code is <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l07.pdf" target="_blank" rel="noopener">here</a> with the tracked change version <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l0c.pdf" target="_blank" rel="noopener">here</a>. This is the second revision of the Code (the first revision was in 2018).The revisions to the JFSA Guidelines for Investor and Company Engagement are <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l3e.pdf" target="_blank" rel="noopener">here</a>. Tracked changes are <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l50.pdf" target="_blank" rel="noopener">here</a>.The major changes to the Code recommend enhancements to Board independence, diversity, Sustainability and ESG, and also recommend improvements to investor accessibility and voting and a small change to listed parent-listed subsidiary relationships which unfortunately will not do much to counter abuse by companies of listed sub minority shareholders. Below is more discussion of the changes and what they mean.But I remind investors, these changes are almost all box-ticking exercises. They will not improve governance for shareholders except at the margins. Companies which "get" good governance are still rare. And those which don't get it seem to abuse shareholders on a regular basis. And for that, investors still need more cowbell.

On Friday 11 June, the TSE published its final revisions to the Corporate Governance Code which had been undergoing review by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code and subsequently comment for the past many months. The new Code went into effect as of 11 June. The first revision to the Guidelines for Investor and Company Engagement were published as well. The new version of Japan's Corporate Governance Code is here with the tracked change version here. This is the second revision of the Code (the first revision was in 2018).The revisions to the JFSA Guidelines for Investor and Company Engagement are here. Tracked changes are here.The major changes to the Code recommend enhancements to Board independence, diversity, Sustainability and ESG, and also recommend improvements to investor accessibility and voting and a small change to listed parent-listed subsidiary relationships which unfortunately will not do much to counter abuse by companies of listed sub minority shareholders. Below is more discussion of the changes and what they mean.But I remind investors, these changes are almost all box-ticking exercises. They will not improve governance for shareholders except at the margins. Companies which "get" good governance are still rare. And those which don't get it seem to abuse shareholders on a regular basis. And for that, investors still need more cowbell.

TSE Prime: Japan's Corporate Governance Code Finalized So Boxes Will Be Furiously Ticked

Event-Driven

In summer of 2016, I warned on Smartkarma that the BOJ was going to have to shift its ETF buy basket away from Nikkei 225. It did so in late 2016. I warned again in early 2018 that it was going to get worse, and suggested a revision to the Nikkei 225 Average methodology in <a href="https://www.smartkarma.com/insights/the-boj-s-ongoing-etf-impact-is-a-nikkei-225-reshuffle-in-the-cards" target="_blank" data-smartkarma-citation="insights:17331" rel="noopener">The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?</a> (followed by <a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank" data-smartkarma-citation="insights:21980" rel="noopener">JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225</a>) whereby there would be a deemed minimum shares outstanding quantity so that Deemed Minimum Shares Out / Shares out multiplied by Existing Deemed Par Value would become NEW Deemed Par Value.
This would mean that some names would see lower weights, but on the whole, the Nikkei 225 basket would be much more liquid. 
Nothing was done. The BOJ again lowered its use of Nikkei 225 ETFs, then recently finally stopped using the average altogether. 
The Nikkei 225 had been made largely irrelevant by the Nikkei's refusal to adapt to the times.
<h2>The NEW News</h2>
Today after the close, the Nikkei Index Team announced the first proposed revision to the methodology of the Nikkei 225 Average in twenty years, and a consultation over the next five weeks. Because the concept of Par Value is no longer used in Japan in the Companies Act, it would get rid of the "Presumed Par Value" or "Deemed Par Value" for members and potential members of the Average, and replace it with a Price Adjustment Factor ("PAF") which is an inverse multiplier of the Deemed Par Value. 
In short.... it would do nothing to the index and its constituents as they stand today.
And new additions would be assigned a PAF which would presumably be related to their previously understood Deemed Par Value. But in any case, new constituents would be capped at 1% weightings so would see their Price Adjustment Factor.... adjusted. 
There are other changes proposed which change the rebalancing possibilities, and there is a note that the Average would only include members of TSE Prime (such that existing TSE1 and Nikkei 225 members which chose not to become members of TSE Prime would find themselves booted from the Nikkei 225. 
This is highly disappointing. A 20-year review could have been so much more interesting and the Nikkei could have rescued itself from effective oblivion. Alas, this misses the mark, by a wide margin. 
But details are details so we look at them below.

In summer of 2016, I warned on Smartkarma that the BOJ was going to have to shift its ETF buy basket away from Nikkei 225. It did so in late 2016. I warned again in early 2018 that it was going to get worse, and suggested a revision to the Nikkei 225 Average methodology in The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards? (followed by JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225) whereby there would be a deemed minimum shares outstanding quantity so that Deemed Minimum Shares Out / Shares out multiplied by Existing Deemed Par Value would become NEW Deemed Par Value.
This would mean that some names would see lower weights, but on the whole, the Nikkei 225 basket would be much more liquid. 
Nothing was done. The BOJ again lowered its use of Nikkei 225 ETFs, then recently finally stopped using the average altogether. 
The Nikkei 225 had been made largely irrelevant by the Nikkei's refusal to adapt to the times.
The NEW News
Today after the close, the Nikkei Index Team announced the first proposed revision to the methodology of the Nikkei 225 Average in twenty years, and a consultation over the next five weeks. Because the concept of Par Value is no longer used in Japan in the Companies Act, it would get rid of the "Presumed Par Value" or "Deemed Par Value" for members and potential members of the Average, and replace it with a Price Adjustment Factor ("PAF") which is an inverse multiplier of the Deemed Par Value. 
In short.... it would do nothing to the index and its constituents as they stand today.
And new additions would be assigned a PAF which would presumably be related to their previously understood Deemed Par Value. But in any case, new constituents would be capped at 1% weightings so would see their Price Adjustment Factor.... adjusted. 
There are other changes proposed which change the rebalancing possibilities, and there is a note that the Average would only include members of TSE Prime (such that existing TSE1 and Nikkei 225 members which chose not to become members of TSE Prime would find themselves booted from the Nikkei 225. 
This is highly disappointing. A 20-year review could have been so much more interesting and the Nikkei could have rescued itself from effective oblivion. Alas, this misses the mark, by a wide margin. 
But details are details so we look at them below. 

After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?)

Japan

KEYENCE CORPORATION develops, manufactures, and sells sensors and measuring instruments used for factory automation (FA) and high technology hobby products. The Company's products include fiber optic sensors, photoelectric sensors, programmable logic controllers (PLC), laser scan micrometers, bar code readers, and radio-controlled model cars.

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Keyence Corp (6861 JP)

Nikkei 225 Index Rebalance: Nintendo, Keyence, Murata IN; Nisshinbo, Toyo Seikan, SKY Perfect OUT

Nintendo, Murata & Keyence are into the Nikkei225 while Nisshinbo, Toyo Seikan & Sky Perfect are out. This trade will be more about the deletes...

Brian Freitas

Critical Supports Holding in the US, Europe, & Japan; Buying Health Care, Utilities, Materials, Tech

Various indicators are making a turn for the better, including early signs of interest rates bottoming in the US and Germany, a false breakdown in...

Vermilion Research

Keyence – Showing Its Quality

Keyence beat with strong top line growth, consistent with the rest of the sector, but a reduction in its SG&A burden was also positive for margins.

Mio Kato

TSE Prime: Japan's Corporate Governance Code Finalized So Boxes Will Be Furiously Ticked

The TSE on Friday announced the revisions to the Governance Code. This codifies the "governance thresholds" required to join TSE Prime next year....

Travis Lundy

After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?)

TWENTY YEARS after its last major index methodology review, the Nikkei has proposed changes to the Nikkei 225. Existing constituents are not...

Travis Lundy

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