Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

After the close today, the Nikkei newspaper revealed the results of the annual review of the various 'traditional' Nikkei indices/averages, including for the Nikkei 225 Average.The results are published&nbsp;<a href="http://indexes.nikkei.co.jp/en/nkave/archives/news/20150904E_1.pdf" target="_blank">here</a>&nbsp;on the Nikkei website.In the Nikkei 225, the additions are DeNA (2432 JP) and Haseko Corporation (1808 JP). The deletions are Heiwa Real Estate (8803 JP) and Nitto Boseki (3110 JP).How much impact Nikkei inclusions and exclusions have is often difficult to know because the&nbsp;Nikkei 225 Average is a price-weighted index, not market-cap or float-cap-weighted.Here I make a quick stab at the numbers. The short and sweet is that based on outstanding ETFs and open-ended mutual funds in Japan (there is almost no pension money in Nikkei 225 so little money in non-listed funds), these funds should hold 17,651 Nikkei baskets worth of stock (or 17.651mm shares of each 50-yen par value stock). I expect the cash&amp;carry position is north of 4 trillion yen.&nbsp;&nbsp;The impact on the EXclusions should be bigger than for the INclusions in this situation but in the grand scheme of things, it is not a huge trade. Probably something like US$180mm to buy on the two inclusion names and it likely will end up being &lt;US$150mm to sell on the close for the two deletion names.More for subscribers&nbsp;below the fold...

After the close today, the Nikkei newspaper revealed the results of the annual review of the various 'traditional' Nikkei indices/averages, including for the Nikkei 225 Average.The results are published&nbsp;here&nbsp;on the Nikkei website.In the Nikkei 225, the additions are DeNA (2432 JP) and Haseko Corporation (1808 JP). The deletions are Heiwa Real Estate (8803 JP) and Nitto Boseki (3110 JP).How much impact Nikkei inclusions and exclusions have is often difficult to know because the&nbsp;Nikkei 225 Average is a price-weighted index, not market-cap or float-cap-weighted.Here I make a quick stab at the numbers. The short and sweet is that based on outstanding ETFs and open-ended mutual funds in Japan (there is almost no pension money in Nikkei 225 so little money in non-listed funds), these funds should hold 17,651 Nikkei baskets worth of stock (or 17.651mm shares of each 50-yen par value stock). I expect the cash&amp;carry position is north of 4 trillion yen.&nbsp;&nbsp;The impact on the EXclusions should be bigger than for the INclusions in this situation but in the grand scheme of things, it is not a huge trade. Probably something like US$180mm to buy on the two inclusion names and it likely will end up being &lt;US$150mm to sell on the close for the two deletion names.More for subscribers&nbsp;below the fold...

Index Rebalance

Nomura Next F Jpx Nikkei 400 / Index Rebalance

On August 7th after the close, the Japan Exchange Group announced the results of its annual review of JPX Nikkei 400 Index Components, resulting in 43 Inclusions and 42 names to be removed.&nbsp;The 42 Exclusions made up a combined weight of 2.7% of the index and as of the close, the 43&nbsp;Inclusions made up a combined expected weight of 5.1%. Toshiba (6502 JP) will be&nbsp;removed from the index because of its recent accounting scandal. TEPCO (9501 JP) was due to enter the index because of its 3-year average ROE and gain in the rankings but when domestic brokers published their expected index change lists in July, domestically there was a critical outcry regarding TEPCO's potential inclusion because of its recent past (and perhaps because of the fact that its E has been crushed and R artificially inflated by government injections and policies).Based on the particular makeup of the universe and relatively strict adherence to the rules and rankings, it is relatively easy to calculate - with a high degree of probability - what the changes in the index will be&nbsp;and last year's review showed that people had OVER-pre-positioned. This year, an arithmetically-weighted basket of the Inclusion Names outperformed its counterpart of Exclusion Names by 5% in the two months to Friday (counting TEPCO and Toshiba the outperformance would have been even higher).CONCLUSIONS<ul><li>As broad rebalances go, this is not terribly large.&nbsp;Based on calculations below, it would be reasonable to expect the total amount tracking the index to be about 3.2-4.0trln yen - not a huge amount. Based on that there would be approximately 240bn yen to buy and 240bn yen to sell (roughlly half exclusion half funding) at current prices.&nbsp;</li><li>The maximum impact in either direction is about 6 days of ADV but the sum total to trade on those two names is about $20mm.&nbsp;</li><li>As with most broad rebalances which are easily predictable, the best way to trade this is perhaps&nbsp;to fade the announcement. It has already moved several percent so there will be unwinds.&nbsp;&nbsp;</li><li>This is STILL a ridiculous index, designed to turn over 10% of its components a year, to over-weight 'new economy' businesses (the more expensive the higher the weight), to penalize those who ultimately become highly successful (market weight cap) and to sell low buy high in doing so (Sony got kicked out a couple of years ago; who will bet against it being put back in within 2yrs at 2-3x the price it got kicked out at?)</li><li>More detail - with tables and rankings - below the fold.</li></ul>

On August 7th after the close, the Japan Exchange Group announced the results of its annual review of JPX Nikkei 400 Index Components, resulting in 43 Inclusions and 42 names to be removed.&nbsp;The 42 Exclusions made up a combined weight of 2.7% of the index and as of the close, the 43&nbsp;Inclusions made up a combined expected weight of 5.1%. Toshiba (6502 JP) will be&nbsp;removed from the index because of its recent accounting scandal. TEPCO (9501 JP) was due to enter the index because of its 3-year average ROE and gain in the rankings but when domestic brokers published their expected index change lists in July, domestically there was a critical outcry regarding TEPCO's potential inclusion because of its recent past (and perhaps because of the fact that its E has been crushed and R artificially inflated by government injections and policies).Based on the particular makeup of the universe and relatively strict adherence to the rules and rankings, it is relatively easy to calculate - with a high degree of probability - what the changes in the index will be&nbsp;and last year's review showed that people had OVER-pre-positioned. This year, an arithmetically-weighted basket of the Inclusion Names outperformed its counterpart of Exclusion Names by 5% in the two months to Friday (counting TEPCO and Toshiba the outperformance would have been even higher).CONCLUSIONSAs broad rebalances go, this is not terribly large.&nbsp;Based on calculations below, it would be reasonable to expect the total amount tracking the index to be about 3.2-4.0trln yen - not a huge amount. Based on that there would be approximately 240bn yen to buy and 240bn yen to sell (roughlly half exclusion half funding) at current prices.&nbsp;The maximum impact in either direction is about 6 days of ADV but the sum total to trade on those two names is about $20mm.&nbsp;As with most broad rebalances which are easily predictable, the best way to trade this is perhaps&nbsp;to fade the announcement. It has already moved several percent so there will be unwinds.&nbsp;&nbsp;This is STILL a ridiculous index, designed to turn over 10% of its components a year, to over-weight 'new economy' businesses (the more expensive the higher the weight), to penalize those who ultimately become highly successful (market weight cap) and to sell low buy high in doing so (Sony got kicked out a couple of years ago; who will bet against it being put back in within 2yrs at 2-3x the price it got kicked out at?)More detail - with tables and rankings - below the fold.

AUG 2015 JPX NIKKEI 400 - Rebalance Announced -  How Much Tracks?  What Are Flows?

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)

2015 Annual Nikkei 225 Rebalance

After the close today, the Nikkei newspaper revealed the results of the annual review of the various 'traditional' Nikkei indices/averages,...

Travis Lundy

AUG 2015 JPX NIKKEI 400 - Rebalance Announced - How Much Tracks? What Are Flows?

On August 7th after the close, the Japan Exchange Group announced the results of its annual review of JPX Nikkei 400 Index Components, resulting in...

Travis Lundy

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