Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>On Thursday, the Nikkei came out with an <a href="https://asia.nikkei.com/Economy/BOJ-to-widen-interest-rate-target-range-to-support-bank-profits" target="_blank" rel="noopener">article</a> during the lunch break of equities trading. The headline said <em>"BOJ to widen interest rate target range to support bank profits" </em>and indeed in the article it noted that the BOJ would allow the long end of the curve to fluctuate more widely, creating a slightly steeper curve. This could lead to slightly better bank profits less because of the extra 5bp on the curve but more because of the expectation of forcing borrowers to pay more on an absolute basis. </p><p>What was MORE important for equity markets was the idea that the BOJ <em>"would also abolish its target for purchasing exchange-traded funds, now 6 trillion yen ($55 billion) per year, and instead vow to make such purchases only in times of market turmoil."</em></p><p>The article also suggested that the "Target" would be removed for the ¥90bn of J-REITs they buy as a base case (doubled now to ¥180bn as the ¥6trln was doubled to ¥12trln in the depths of the covid crash of March 2020). </p><p>This move caused Nikkei to underperform TOPIX on the day. TOPIX actually ended up on the day, and ended above where the market closed the AM session before the article came out. Nikkei fell, and started underperforming TOPIX from that point on. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/872/original/Screenshot+2021-03-21+at+3.26.17+PM.png?1616311594" class="editor-image img-responsive" data-smartkarma-image-id="195872"></figure><p></p></section><p>Nikkei underperformed TOPIX in the AM session on Friday, and when the BOJ announcements came mid-day on Friday, there were additional subtleties involved. </p><p>The details are <a href="https://www.boj.or.jp/en/announcements/release_2021/rel210319c.pdf" target="_blank" rel="noopener">here</a>. The presentation with the basic details is <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319b.pdf" target="_blank" rel="noopener">here</a>.</p><ul>
<li>The target rates for ETF and REIT buying will be abolished, but the current "Target Rate" of annual buying will become annual maxima (¥12 trillion for ETFs, ¥180bn for J-REITs, with ongoing maximum ownership limits on ETFs in place).</li>
<li>Buying of ETFs and J-REITs will be conducted "as necessary" "in times of market turbulence" and such buying will be done only on TOPIX ETFs.</li>
<li>The "Special Rules for Purchases of ETFs to Support Firms Proactively Investing in Physical and Human Capital" will continue as before with only specific ETFs permitted in this group. The amount of ~¥300bn/year and ¥1.2bn per business day will continue.</li>
</ul><p>It based the new policy on the Reference <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319c.pdf" target="_blank" rel="noopener">document</a> which backs up the changes in policy is <em>much</em> more interesting reading.  Appendix 5 and Chart 12 are the parts you want to read.</p><p>The hypotheses and results are described here.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/869/original/Screenshot+2021-03-21+at+3.02.28+PM.png?1616310186" class="editor-image img-responsive" data-smartkarma-image-id="195869"></figure></section><p>There are a couple of other side conclusions but the base understanding is...</p><div class="content-highlight"><p>When the BOJ steps into the market in size, in times of market turbulence, and when stocks are trading below their medium-term average, it has a greater effect per dollar spent on market-wide risk premia as measured in option premia than buying in normal times, and size matters when looking at the risk premia change on single stocks.  </p></div><h3>What This Means</h3><ul>
<li>When the BOJ steps into the market in size, in times of market turbulence, and when stocks are trading below their medium-term average, it has a greater effect per dollar spent on market-wide risk premia as measured in option premia than buying in normal times, and size matters when looking at the risk premia change on single stocks.  </li>
<li>Expect the BOJ to follow the concept of its study (Appendix 5 again).</li>
<li>Expect the BOJ to pay greater attention to futures activity. </li>
</ul><h3>What This Does NOT Mean</h3><ul><li>It does NOT mean the BOJ will be selling any ETFs.</li></ul><hr><p>It is worthwhile taking a look at WHY the market reacted the way it did on Thursday and Friday afternoon, and it is worthwhile looking at what the BOJ ETF buying might look like going forward. </p><p>So we do so below the fold.</p><p>Note: This is part 1 of the analysis of potential future BOJ ETF Buying. Part II looks at the difference in single stock makeup. </p>

On Thursday, the Nikkei came out with an article during the lunch break of equities trading. The headline said "BOJ to widen interest rate target range to support bank profits" and indeed in the article it noted that the BOJ would allow the long end of the curve to fluctuate more widely, creating a slightly steeper curve. This could lead to slightly better bank profits less because of the extra 5bp on the curve but more because of the expectation of forcing borrowers to pay more on an absolute basis. What was MORE important for equity markets was the idea that the BOJ "would also abolish its target for purchasing exchange-traded funds, now 6 trillion yen ($55 billion) per year, and instead vow to make such purchases only in times of market turmoil."The article also suggested that the "Target" would be removed for the ¥90bn of J-REITs they buy as a base case (doubled now to ¥180bn as the ¥6trln was doubled to ¥12trln in the depths of the covid crash of March 2020). This move caused Nikkei to underperform TOPIX on the day. TOPIX actually ended up on the day, and ended above where the market closed the AM session before the article came out. Nikkei fell, and started underperforming TOPIX from that point on. Nikkei underperformed TOPIX in the AM session on Friday, and when the BOJ announcements came mid-day on Friday, there were additional subtleties involved. The details are here. The presentation with the basic details is here.
The target rates for ETF and REIT buying will be abolished, but the current "Target Rate" of annual buying will become annual maxima (¥12 trillion for ETFs, ¥180bn for J-REITs, with ongoing maximum ownership limits on ETFs in place).
Buying of ETFs and J-REITs will be conducted "as necessary" "in times of market turbulence" and such buying will be done only on TOPIX ETFs.
The "Special Rules for Purchases of ETFs to Support Firms Proactively Investing in Physical and Human Capital" will continue as before with only specific ETFs permitted in this group. The amount of ~¥300bn/year and ¥1.2bn per business day will continue.
It based the new policy on the Reference document which backs up the changes in policy is much more interesting reading.  Appendix 5 and Chart 12 are the parts you want to read.The hypotheses and results are described here.There are a couple of other side conclusions but the base understanding is...When the BOJ steps into the market in size, in times of market turbulence, and when stocks are trading below their medium-term average, it has a greater effect per dollar spent on market-wide risk premia as measured in option premia than buying in normal times, and size matters when looking at the risk premia change on single stocks.  What This Means
When the BOJ steps into the market in size, in times of market turbulence, and when stocks are trading below their medium-term average, it has a greater effect per dollar spent on market-wide risk premia as measured in option premia than buying in normal times, and size matters when looking at the risk premia change on single stocks.  
Expect the BOJ to follow the concept of its study (Appendix 5 again).
Expect the BOJ to pay greater attention to futures activity. 
What This Does NOT MeanIt does NOT mean the BOJ will be selling any ETFs.It is worthwhile taking a look at WHY the market reacted the way it did on Thursday and Friday afternoon, and it is worthwhile looking at what the BOJ ETF buying might look like going forward. So we do so below the fold.Note: This is part 1 of the analysis of potential future BOJ ETF Buying. Part II looks at the difference in single stock makeup. 

Quantifying the BOJ Change in ETF Policy: Assessing Future ETF Buying Methodology

Senior Credit Analyst, Lucror Analytics

Leonard Law, CFA

Senior Credit Analyst

High Yield Experts

Lucror Analytics

Lucror Analytics is a leading credit and ESG research specialist and a provider of technology solutions for differentiated fixed income strategies. Our roots are in bottom-up fundamental credit analysis with a specialization in high yield corporate credits from Europe, Asia and Latin America. We are one of few research specialists integrating ESG considerations with fundamental credit research through a dedicated ESG platform. Our ESG assessment covers five key criteria: Disclosure, E,S, & G Pillars, Controversies, ESG Impact on Credit and ESG Momentum.

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Our company has been at the forefront of developments in the fixed income markets, identifying opportunities and consistently delivering new products and value-adding solutions to clients. Lucror has close relationships with the largest and most reputable asset managers, family offices, hedge funds, investment and wealth managers globally.

Credit

<p><br/> The Europe HY Trade Book for March 2021 includes high-conviction trade ideas drawn from our European HY coverage universe, along with relative-value scatter plots and tables by industry.<br/></p>

  The Europe HY Trade Book for March 2021 includes high-conviction trade ideas drawn from our European HY coverage universe, along with relative-value scatter plots and tables by industry. 

Europe HY Trade Book - March 2021 - Lucror Analytics

<p>Whether it be global rate markets expecting more inflation, inflation becoming visible, or US stimulus payments and China's not unimpressive economic results last year, or even a rebounding dollar/yen rate and better-than-expected Japanese corporate earnings, the BOJ has decided now that it can step mostly back. </p><p>The Nikkei newspaper <a href="https://asia.nikkei.com/Economy/BOJ-to-widen-interest-rate-target-range-to-support-bank-profits" target="_blank" rel="noopener">reported</a> at noon Japan time today that the Bank of Japan would increase the range of fluctuation permitted around its long-term interest rate guidance policy to 0.25% plus or minus vs the current center rate of 0.20%. </p><div class="content-highlight">
<p>The bigger news in terms of markets is likely to be the news about ETFs. The BOJ has had a "Target ETF Purchasing Rate" of ¥6 trillion/year for the past few years though actual purchasing has fluctuated up and down with demand (and famously briefly popped last March in the covid-crash).</p>
<p>The new guidance, according to the Nikkei, will be that the ¥6 trillion/year target will be abolished and the BOJ will only step in when markets get turbulent. </p>
</div><div>
<p>The subject of the BOJ stopping to buy ETFs has been a repeated question of interest in Parliament when Mr Kuroda makes an appearance, and any number of People With Important Thoughts have opined on the issue, saying the BOJ should stop buying stocks.</p>
<p>When Mr Kuroda was in front of parliament four months ago in mid-November, answering questions about when the BOJ would stop and what it would do to stop buying, he was quite clear with his answer. From a Reuters <a href="https://www.reuters.com/article/japan-economy-kuroda-etf-idUST9N2GT02I" target="_blank" rel="noopener">note</a> ...</p>
</div><div><blockquote>
<p>The BOJ already buys ETFs “quite flexibly” and can reduce purchases when the market risk premium is not rising, Kuroda told parliament.</p>
<p>“If inflation hits our 2% target and an exit from our massive stimulus programme comes into sight, there will certainly be debate on how to end our ETF buying. But it’s premature to do so at this stage.”</p>
</blockquote></div><div>
<p>Kazuo Momma, who used to be assistant governor at the BOJ and is now an economist at the Mizuho Research Institute had recently criticized the entire program, saying it is not something central banks should be doing. </p>
<blockquote>
<p>"The BOJ's ETF buying started out as an emergency step. It's not something central banks should be doing in the first place," he told <a href="https://www.marketscreener.com/quote/currency/EURO-JAPANESE-YEN-EUR-4592/news/Ideas-emerge-for-alternative-ways-to-unload-Bank-of-Japan-s-huge-ETF-holdings-31827846/" target="_blank" rel="noopener">Reuters</a> [in response to the Kuroda Diet sessions].</p>
<p>"At the very least, the BOJ should stop buying ETFs except for when market sentiment sours enough to inflict severe damage to the economy."</p>
</blockquote>
<p>After its December meeting, the BOJ said it would be conducting a policy review and the official review is expected tomorrow after the MPC decisions.</p>
<p>The Nikkei has jumped the gun. One assumes they do so with a fair bit of insider knowledge. But this policy looks like it came from Kazuo Momma.</p>
<p>But this should not come as that much of a surprise. </p>
<p>The chart below can be separated into three sections. The thick red line stepping up is the official policy purchase rate line and the blue lines around it are actual BOJ purchases. The red and yellow dots (with the thin red line average) are the AM session down performance on days when the BOJ does NOT buy, showing that on average, the BOJ is letting larger falls go by without stepping in, and the green line is TOPIX.</p>
<section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/215/original/Screenshot+2021-03-18+at+1.31.06+PM.png?1616045488" class="editor-image img-responsive" data-smartkarma-image-id="195215"></figure></section><p>This tells you the BOJ has been less present than for a long time, and has stepped back. The BOJ has been virtually tapering for months. The fact that they stepped in early and in size last March tells you what they will do if things get turbulent.</p></section><p>The question now is what does that change. </p>
<p>That and understanding the impact of the cessation of buying on different stocks below the fold. </p>
</div>

Whether it be global rate markets expecting more inflation, inflation becoming visible, or US stimulus payments and China's not unimpressive economic results last year, or even a rebounding dollar/yen rate and better-than-expected Japanese corporate earnings, the BOJ has decided now that it can step mostly back. The Nikkei newspaper reported at noon Japan time today that the Bank of Japan would increase the range of fluctuation permitted around its long-term interest rate guidance policy to 0.25% plus or minus vs the current center rate of 0.20%. 
The bigger news in terms of markets is likely to be the news about ETFs. The BOJ has had a "Target ETF Purchasing Rate" of ¥6 trillion/year for the past few years though actual purchasing has fluctuated up and down with demand (and famously briefly popped last March in the covid-crash).
The new guidance, according to the Nikkei, will be that the ¥6 trillion/year target will be abolished and the BOJ will only step in when markets get turbulent. 

The subject of the BOJ stopping to buy ETFs has been a repeated question of interest in Parliament when Mr Kuroda makes an appearance, and any number of People With Important Thoughts have opined on the issue, saying the BOJ should stop buying stocks.
When Mr Kuroda was in front of parliament four months ago in mid-November, answering questions about when the BOJ would stop and what it would do to stop buying, he was quite clear with his answer. From a Reuters note ...

The BOJ already buys ETFs “quite flexibly” and can reduce purchases when the market risk premium is not rising, Kuroda told parliament.
“If inflation hits our 2% target and an exit from our massive stimulus programme comes into sight, there will certainly be debate on how to end our ETF buying. But it’s premature to do so at this stage.”

Kazuo Momma, who used to be assistant governor at the BOJ and is now an economist at the Mizuho Research Institute had recently criticized the entire program, saying it is not something central banks should be doing. 

"The BOJ's ETF buying started out as an emergency step. It's not something central banks should be doing in the first place," he told Reuters [in response to the Kuroda Diet sessions].
"At the very least, the BOJ should stop buying ETFs except for when market sentiment sours enough to inflict severe damage to the economy."

After its December meeting, the BOJ said it would be conducting a policy review and the official review is expected tomorrow after the MPC decisions.
The Nikkei has jumped the gun. One assumes they do so with a fair bit of insider knowledge. But this policy looks like it came from Kazuo Momma.
But this should not come as that much of a surprise. 
The chart below can be separated into three sections. The thick red line stepping up is the official policy purchase rate line and the blue lines around it are actual BOJ purchases. The red and yellow dots (with the thin red line average) are the AM session down performance on days when the BOJ does NOT buy, showing that on average, the BOJ is letting larger falls go by without stepping in, and the green line is TOPIX.
This tells you the BOJ has been less present than for a long time, and has stepped back. The BOJ has been virtually tapering for months. The fact that they stepped in early and in size last March tells you what they will do if things get turbulent.The question now is what does that change. 
That and understanding the impact of the cessation of buying on different stocks below the fold. 


Changes In BOJ ETF Buying - Which Stocks Impacted and How?

Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

<p>Starting today, Coupang employees are eligible to sell some of their shares, the start of a series of early expirations for lock-up clauses that could add 208mn (12% of total S/O) to the float over the next three months. How much comes into the market depends on whether the share price remains above the IPO price (c. 3% eligible sold by employees) or is 33% higher (c. 9% eligible, sold by strategic shareholders). We expect Vision Fund to be a seller if the share price remains elevated but a 14% decline over the last few days means that may not be a sure thing.  </p>

Starting today, Coupang employees are eligible to sell some of their shares, the start of a series of early expirations for lock-up clauses that could add 208mn (12% of total S/O) to the float over the next three months. How much comes into the market depends on whether the share price remains above the IPO price (c. 3% eligible sold by employees) or is 33% higher (c. 9% eligible, sold by strategic shareholders). We expect Vision Fund to be a seller if the share price remains elevated but a 14% decline over the last few days means that may not be a sure thing.  

Coupang - A Summary of Early Lock-Up Expirations

<p>Coupang’s monster IPO is very likely to be the highlight of Vision Fund 1 and provides a solid counterpoint to the WeWork debacle early in the IPO cycle but there remains a significant number of portfolio companies still to come. At Q3 results, Softbank talked about an ongoing parade of companies coming to market with 10-15 annual events but there is a push to get companies to list whilst markets are still receptive and FY21 could see up to 20 companies hit public markets.</p><p>That is positive for Softbank shares which tend to rise in anticipation of surfaced value, again assuming the IPO market remains open. It also serves to highlight the main risk for Softbank shares as a sustained tech sell-off would lower the value of the Vision Fund portfolio, increase concerns about Northstar and lower expectations for the current crop of IPO hopefuls.</p><h2><strong>Highlights</strong></h2><p><strong>Softbank Vision Fund could see up to 20 companies hitting public markets 2021 should favorable conditions continue. </strong>Vision Fund says it is encouraging companies to go public whilst conditions are still receptive and Q4 (Mar) can already boast of two listings, a SPAC merger and two more listings in process. Leading candidates to go public include Didi Chuxing and Grab</p><p><strong>Coupang upside alone doubles total returns and will boost Vision Fund to its best quarter ever.  </strong>As of mid-March, Vision Fund’s public portfolio is up $27bn versus $13bn in Q2, $8bn in Q2 and $2bn in Q1. On the aggregate, it more than doubles the Vision Fund total return </p><p><strong>There may upside in the private portfolio too as Cruise raised funds in January at a 58% premium</strong>. It is usually a mug’s game trying to figure out where private valuations will end up but the Cruise stake is large enough to outweigh a lot of smaller changes for other portfolio companies. Cruise raised $2bn in January at a $30bn valuation, a 58% premium to where Softbank invested and a possible $1.3bn unrealized gain ($2.25bn &gt; $3.55bn)</p><p><strong>Portfolio company View went public through a SPAC merger but at an apparent loss for Vision Fund</strong>.  Smart glass maker View’s SPAC merger closed 9 March, the day before the Coupang IPO but it appears Softbank’s original $1.1bn investment is worth barely half that. That is a fraction of the Coupang upside but is a reminder that valuations can go both ways. Other problem investments include Greensill, Katerra, Oyo and OakNorth</p>

Coupang’s monster IPO is very likely to be the highlight of Vision Fund 1 and provides a solid counterpoint to the WeWork debacle early in the IPO cycle but there remains a significant number of portfolio companies still to come. At Q3 results, Softbank talked about an ongoing parade of companies coming to market with 10-15 annual events but there is a push to get companies to list whilst markets are still receptive and FY21 could see up to 20 companies hit public markets.That is positive for Softbank shares which tend to rise in anticipation of surfaced value, again assuming the IPO market remains open. It also serves to highlight the main risk for Softbank shares as a sustained tech sell-off would lower the value of the Vision Fund portfolio, increase concerns about Northstar and lower expectations for the current crop of IPO hopefuls.HighlightsSoftbank Vision Fund could see up to 20 companies hitting public markets 2021 should favorable conditions continue. Vision Fund says it is encouraging companies to go public whilst conditions are still receptive and Q4 (Mar) can already boast of two listings, a SPAC merger and two more listings in process. Leading candidates to go public include Didi Chuxing and GrabCoupang upside alone doubles total returns and will boost Vision Fund to its best quarter ever.  As of mid-March, Vision Fund’s public portfolio is up $27bn versus $13bn in Q2, $8bn in Q2 and $2bn in Q1. On the aggregate, it more than doubles the Vision Fund total return There may upside in the private portfolio too as Cruise raised funds in January at a 58% premium. It is usually a mug’s game trying to figure out where private valuations will end up but the Cruise stake is large enough to outweigh a lot of smaller changes for other portfolio companies. Cruise raised $2bn in January at a $30bn valuation, a 58% premium to where Softbank invested and a possible $1.3bn unrealized gain ($2.25bn &gt; $3.55bn)Portfolio company View went public through a SPAC merger but at an apparent loss for Vision Fund.  Smart glass maker View’s SPAC merger closed 9 March, the day before the Coupang IPO but it appears Softbank’s original $1.1bn investment is worth barely half that. That is a fraction of the Coupang upside but is a reminder that valuations can go both ways. Other problem investments include Greensill, Katerra, Oyo and OakNorth

Softbank Group - Vision Fund’s Race to Liquidity

Japan

SoftBank Group Corp provides telecommunication services.  The Company also operates ADSL (Asymmetric Digital Subscriber Line) and fiber optic high-speed Internet connection, e-Commerce businesses, and Internet based advertising and auction businesses.

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Softbank Group (ADR) (SFTBY US)

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Vision Fund is pushing portfolio companies to go public (up to 20 this year!) which should help the discount but also depends a lot on how tech...

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