Co-Founder & CEO, Newmark Risk

Nicholas Pezolano

Co-Founder & CEO

Option analytics for institutional investors

Newmark Risk

Fin-tech company focused on providing option derived analytics for institutional investors.

We handle the complexity of options data so you don't have to.

- Data and Analytics available all in one place so you can focus on Strategy Development
- Custom Solutions for your data and/or portfolio needs
- Advisory services to lend our expertise

Knowledge is something that was meant to be shared and we provide insights to our clients and to the community via posting about our research findings.

Event-Driven

TSE Tokyo Price Index TOPIX / Event-Driven

<ul><li>A cross-country study on the post earning announcement drift effect.</li><li>We explore the use of various options-implied analytics to systematically view returns around earnings announcements.  </li><li>Options-Implied Analytics can provide empowering information to better inform investment decisions.</li></ul>

A cross-country study on the post earning announcement drift effect.We explore the use of various options-implied analytics to systematically view returns around earnings announcements.  Options-Implied Analytics can provide empowering information to better inform investment decisions.

EQD | A Systematic Look at the Post Earnings Announcement Drift Across Asia

Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

<ul>
<li>Since 2020, there has been a divergence between P/B and TOPIX movements, complicating matters for listed companies that have been asked to raise their P/Bs.</li>
<li>Expectations are high for a rise in ROE, which has a certain correlation with nominal GDP, which is also increasingly correlated with TOPIX, as deflation exits.</li>
<li>If price pass-through fails, escaping deflation may not lead directly to higher profit margins. If profit margin increase is insufficient, reducing cash on hand is essential to increase ROE.</li>
</ul>


Since 2020, there has been a divergence between P/B and TOPIX movements, complicating matters for listed companies that have been asked to raise their P/Bs.
Expectations are high for a rise in ROE, which has a certain correlation with nominal GDP, which is also increasingly correlated with TOPIX, as deflation exits.
If price pass-through fails, escaping deflation may not lead directly to higher profit margins. If profit margin increase is insufficient, reducing cash on hand is essential to increase ROE.


Isn't It Not Strong Enough to Raise ROE by Higher Profit Margin Due to Escape from Deflation?

<ul>
<li>Net profit per listed company increased 4.4 times over the 33 years from 1989 to 2023, which means only a modest 4.5% annual growth.</li>
<li>The reason why ROE has been sluggish since FY 2005 is due to the slow growth of Net Profit Margin, the decline of Asset Turnover, and the flat financial leverage.</li>
<li>When the escape from deflation becomes a reality, the key is to have products ready to pass on prices, and defense by cash alone is not sufficient for this purpose.</li>
</ul>


Net profit per listed company increased 4.4 times over the 33 years from 1989 to 2023, which means only a modest 4.5% annual growth.
The reason why ROE has been sluggish since FY 2005 is due to the slow growth of Net Profit Margin, the decline of Asset Turnover, and the flat financial leverage.
When the escape from deflation becomes a reality, the key is to have products ready to pass on prices, and defense by cash alone is not sufficient for this purpose.


How Long Will the Escape from Deflation Be a Greater Factor in Stock Price Rises than ROE?

<ul>
<li>Nominal GDP grew 1.8% from 2012 to 2017, higher than the annual average over the past 33 years, in anticipation of an escape from deflation, but TOPIX gains have stalled.</li>
<li>Nominal GDP from 2021 to 2023 will grow 3.8% per year, far above the average of the past 33 years, and the correlation with TOPIX is even higher.</li>
<li>With average P/B showing little correlation with TOPIX after 2020, expanding nominal earnings without losing out to rising prices seems to be a more important factor for stock price appreciation.</li>
</ul>


Nominal GDP grew 1.8% from 2012 to 2017, higher than the annual average over the past 33 years, in anticipation of an escape from deflation, but TOPIX gains have stalled.
Nominal GDP from 2021 to 2023 will grow 3.8% per year, far above the average of the past 33 years, and the correlation with TOPIX is even higher.
With average P/B showing little correlation with TOPIX after 2020, expanding nominal earnings without losing out to rising prices seems to be a more important factor for stock price appreciation.


In Correlation with TOPIX, Nominal GDP Has Become Even Higher, While P/B Has Been Scarce Since 2020

<ul>
<li>Overseas investors tend to invest in companies with large market capitalization and high profitability, resulting in higher stock price valuations. They also tend to avoid investing in listed subsidiaries.</li>
<li>Since companies with over 20% foreign ownership show superior board practices, it’s reasonable to assume that board practices improve as foreign ownership increases and the influence of overseas investors increases.</li>
<li>Companies with more than 30% foreign ownership have many items that generally show excellent values in Key Actions. However, all companies still face challenges in cash allocation.</li>
</ul>


Overseas investors tend to invest in companies with large market capitalization and high profitability, resulting in higher stock price valuations. They also tend to avoid investing in listed subsidiaries.
Since companies with over 20% foreign ownership show superior board practices, it’s reasonable to assume that board practices improve as foreign ownership increases and the influence of overseas investors increases.
Companies with more than 30% foreign ownership have many items that generally show excellent values in Key Actions. However, all companies still face challenges in cash allocation.


Drivers of Corporate Governance Improvement Are the Percentage of Foreign Shareholdings

Japan

The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.

TSE Tokyo Price Index TOPIX (TPX INDEX)

EQD | A Systematic Look at the Post Earnings Announcement Drift Across Asia

We leverage a few analytics from NewMark Risk's proprietary Options Implied Analytics library to enhance common strategies to trade earnings...

Nicholas Pezolano

Isn't It Not Strong Enough to Raise ROE by Higher Profit Margin Due to Escape from Deflation?

TSE's request to raise the P/B also includes expectations for ROE improvement, and I would like to discuss whether ROE will increase in the future.

Metrical Inc

How Long Will the Escape from Deflation Be a Greater Factor in Stock Price Rises than ROE?

I would like to discuss the issues on the February 22 Nikkei article, "Net Profit of Listed Companies Increases 7 Times in 34 Years; ROE Lags...

Metrical Inc

In Correlation with TOPIX, Nominal GDP Has Become Even Higher, While P/B Has Been Scarce Since 2020

I would like to discuss the issues on the February 23 Nikkei article, "Foreign Money Rediscovers Japan, Expecting a Shift to a 'Changing Country'."

Metrical Inc

Drivers of Corporate Governance Improvement Are the Percentage of Foreign Shareholdings

Based on the % of foreign ownership, I have tried to determine the characteristics of the companies in which overseas investors invest and what...

Metrical Inc