Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Quantitative Analysis

<blockquote>
Enhancement of Monetary Easing in Light of the Impact of the Outbreak of the Novel Coronavirus (COVID-19)
Global financial and capital markets have been unstable, with growing uncertainties over the global economy due mainly to the impact of the outbreak of COVID-19. Under the circumstances, Japan's economic activity has been weak recently (see Attachment). In addition, financial conditions have become less accommodative, as seen partly in corporate financing such as the financial positions of small and medium-sized firms.
Given these developments, the Bank of Japan judged it appropriate to enhance monetary easing through (1) the further ample supply of funds by conducting various operations including purchases of Japanese government bonds (JGBs) and the U.S. dollar funds-supplying operations, (2) measures to facilitate corporate financing including the introduction of a new operation, and (3) active purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs). The Bank will take these measures with a view to doing its utmost to ensure smooth corporate financing and maintaining stability in financial markets, thereby preventing firms' and households' sentiment from deteriorating.
</blockquote>To further those goals, the BOJ decided to...<ol>
<li>
Provide ample yen funds through further JGB buying, and through other measures described in #2-3. As for U.S. dollar liquidity, coordinated with the Bank of Canada (BOC), the Bank of England (BOE), the European Central Bank (ECB), the Federal Reserve, and the Swiss National Bank (SNB), regarding the U.S. dollar funds-supplying operations, the Bank made public today to lower the loan rate by 0.25 percent and offer U.S. dollars weekly 2 with an 84-day maturity, in addition to the 1-week maturity operations currently offered. </li>
<li>
Introduction of the Special Funds-Supplying Operations to Facilitate Corporate Financing regarding the Novel Coronavirus (COVID-19).  <ol>
<li>The Bank decided to provide loans against corporate debt (of about 8 trillion yen as of end-February 2020) as collateral at the interest rate of 0 percent with maturity up to one year. Twice as much as the amount outstanding of the loans will be included in the Macro Add-on Balances in current accounts held by financial institutions at the Bank. This operation will be conducted until the end of September 2020.</li>
<li>Increase in purchases of CP and corporate bonds The Bank decided, by a unanimous vote, to increase the upper limit to purchase CP and corporate bonds by 2 trillion yen in total and conduct purchases with the upper limit of their amounts outstanding of about 3.2 trillion yen and about 4.2 trillion yen, respectively. The additional purchases will continue until the end of September 2020</li>
</ol>
</li>
<li>
Do more Active ETF and JREIT Buying: The Bank decided, by a unanimous vote, to actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion yen and about 180 billion yen, respectively.</li>
</ol>After the BOJ announced this, the market fell. Some of this increase was expected because of various local media commentary by informed sources, suggesting the BOJ was considering measures like this. The reason the market fell was likely profit-taking - a sell-the-news phenomenon.The other possible reason for selling was disappointment that the new level of ETF buying was not made permanent.Those who are "disappointed" by this are mistaken.The BOJ will buy at that increased rate as long as it needs to supply funds to the market. If the market doesn't go up, they will likely keep on buying "for the time being." If the market goes up, then the program has been a success. Understanding the practical impacts is important. That's discussed below.


Enhancement of Monetary Easing in Light of the Impact of the Outbreak of the Novel Coronavirus (COVID-19)
Global financial and capital markets have been unstable, with growing uncertainties over the global economy due mainly to the impact of the outbreak of COVID-19. Under the circumstances, Japan's economic activity has been weak recently (see Attachment). In addition, financial conditions have become less accommodative, as seen partly in corporate financing such as the financial positions of small and medium-sized firms.
Given these developments, the Bank of Japan judged it appropriate to enhance monetary easing through (1) the further ample supply of funds by conducting various operations including purchases of Japanese government bonds (JGBs) and the U.S. dollar funds-supplying operations, (2) measures to facilitate corporate financing including the introduction of a new operation, and (3) active purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs). The Bank will take these measures with a view to doing its utmost to ensure smooth corporate financing and maintaining stability in financial markets, thereby preventing firms' and households' sentiment from deteriorating.
To further those goals, the BOJ decided to...

Provide ample yen funds through further JGB buying, and through other measures described in #2-3. As for U.S. dollar liquidity, coordinated with the Bank of Canada (BOC), the Bank of England (BOE), the European Central Bank (ECB), the Federal Reserve, and the Swiss National Bank (SNB), regarding the U.S. dollar funds-supplying operations, the Bank made public today to lower the loan rate by 0.25 percent and offer U.S. dollars weekly 2 with an 84-day maturity, in addition to the 1-week maturity operations currently offered. 

Introduction of the Special Funds-Supplying Operations to Facilitate Corporate Financing regarding the Novel Coronavirus (COVID-19).  
The Bank decided to provide loans against corporate debt (of about 8 trillion yen as of end-February 2020) as collateral at the interest rate of 0 percent with maturity up to one year. Twice as much as the amount outstanding of the loans will be included in the Macro Add-on Balances in current accounts held by financial institutions at the Bank. This operation will be conducted until the end of September 2020.
Increase in purchases of CP and corporate bonds The Bank decided, by a unanimous vote, to increase the upper limit to purchase CP and corporate bonds by 2 trillion yen in total and conduct purchases with the upper limit of their amounts outstanding of about 3.2 trillion yen and about 4.2 trillion yen, respectively. The additional purchases will continue until the end of September 2020



Do more Active ETF and JREIT Buying: The Bank decided, by a unanimous vote, to actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion yen and about 180 billion yen, respectively.
After the BOJ announced this, the market fell. Some of this increase was expected because of various local media commentary by informed sources, suggesting the BOJ was considering measures like this. The reason the market fell was likely profit-taking - a sell-the-news phenomenon.The other possible reason for selling was disappointment that the new level of ETF buying was not made permanent.Those who are "disappointed" by this are mistaken.The BOJ will buy at that increased rate as long as it needs to supply funds to the market. If the market doesn't go up, they will likely keep on buying "for the time being." If the market goes up, then the program has been a success. Understanding the practical impacts is important. That's discussed below.

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

<ul>
<li>
Weak Quarter:Hong Kong Exchanges and Clearing (388.HK) [HKEx] reported EPS results of HKD 1.57  - down 11% linked quarter.  The weak results are primarily be attributed to reduced investment income on the back of the lower interest rate environment, and higher operating expenses related to both staff and non-staff costs.  </li>
<li> No Real Discussion of 2020:  Velocity and ADTV no doubt will decline, as tech IPOs get delayed and many large travel-related companies are more likely to file for bankruptcy. Mainland China’s debt-laden developers were already facing a cash-crunch prior to the corona virus pandemic and problems are now exacerbated. Most builders only have a cash buffer of just three months. The mainland Chinese government's lockdown and travel restrictions are in month two - intimating that developer defaults will accelerate in March 2020. It's probably fair to say that the 105% Northbound growth in 2019 was no more than a head fake.  </li>
</ul><ul><li>
Focus, Focus, Focus: This is a management tea, who all too often, gets distracted and fails to meet both near and long-term targets. That outrageous London Stock Exchange bid of USD 39 bn alone should have cost Charles Li his CEO title. Nevertheless, we are hopeful that HKEx has learned that this failure/distraction has caused an enormous loss of market confidence. </li></ul>



Weak Quarter:Hong Kong Exchanges and Clearing (388.HK) [HKEx] reported EPS results of HKD 1.57  - down 11% linked quarter.  The weak results are primarily be attributed to reduced investment income on the back of the lower interest rate environment, and higher operating expenses related to both staff and non-staff costs.  
 No Real Discussion of 2020:  Velocity and ADTV no doubt will decline, as tech IPOs get delayed and many large travel-related companies are more likely to file for bankruptcy. Mainland China’s debt-laden developers were already facing a cash-crunch prior to the corona virus pandemic and problems are now exacerbated. Most builders only have a cash buffer of just three months. The mainland Chinese government's lockdown and travel restrictions are in month two - intimating that developer defaults will accelerate in March 2020. It's probably fair to say that the 105% Northbound growth in 2019 was no more than a head fake.  

Focus, Focus, Focus: This is a management tea, who all too often, gets distracted and fails to meet both near and long-term targets. That outrageous London Stock Exchange bid of USD 39 bn alone should have cost Charles Li his CEO title. Nevertheless, we are hopeful that HKEx has learned that this failure/distraction has caused an enormous loss of market confidence. 

HKEx - Management's Art of Saying Nothing

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/403/original/2020-02-18_08-44-22.png?1581983074" class="editor-image img-responsive" data-smartkarma-image-id="118403"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/404/original/2020-02-18_08-42-56.png?1581983098" class="editor-image img-responsive" data-smartkarma-image-id="118404"></figure><div class="content-caption">Source • Japan Analytics</div>THREE-YEAR LOW - With <a href="https://www.smartkarma.com/entities/bridgestone-corp" target="_blank" data-smartkarma-citation="entities:8914:1" rel="noopener">Bridgestone (5108 JP)</a>'s results and revision now added, our final tally for this season is a 196 basis point decline in our Results Sore - the lowest since March 2017.  In contrast, the Forecast/Revision Score reached a three-month high as the 470 companies with December year-ends put an optimistic gloss on their medium-term outlook. As we have noted in our recent daily roundups, a normal precondition for a cycle low is for the Forecast/Revision Score to rise above the Results Score. Forecast/Revision Score peaks and troughs usually occur one to two quarters ahead of those for the Results Score.  Covid-19's impact will likely see the 2016 'playbook' repeated next quarter with a lower Results Score and a 'sideways' Forecast/Results Score. The Results Score cycle low point will be reached with the mostly-interim results to be released in six months. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/405/original/2020-02-18_09-29-28.png?1581985792" class="editor-image img-responsive" data-smartkarma-image-id="118405"></figure><div class="content-caption">Source • Japan Analytics</div>LEADING INDICATOR - By including several momentum factors into our Scoring (see below), we can provide a better indication of future business conditions. Indeed there is a 0.83 correlation between the Cabinet Office's Business Condition Leading Indicator and the Forecast/Revision Score. Reported earnings, as well as company forecasts, are lagging indicators and, as shown in Part 1 of this Insight. Both data series peaked one year after our Scores and the market peaked in early 2018. SCORING METHODOLOGY - For those new to these Insights, we briefly recap our scoring methodology below:-<ul>
<li>Results Scores are calculated using the most recent eight quarters of company data for Revenues, Operating Income and Operating Margin and, for each, measure the rate, degree and consistency of change. The Results Score has a maximum of +30 and a minimum of -30 for each period. Our data series commences from the time a particular company issues quarterly results. The sample size becomes significant from March 2005.</li>
<li>The Forecast/Revision Score is based on both Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This Score also has a maximum of +30 and a minimum of -30 for each period.  For this series, our data samples start from August 2008.</li>
<li>The combined Results &amp; Revision Score (RRS) is the average of the Results Score and the Forecasts/Revision Score.</li>
<li>
All company Scores are then cap-weight-aggregated into Sector, Peer Group and Market Composite Scores for which the seventeen-year monthly and two-year daily track records are shown above. Only currently listed-companies are covered in the aggregate Scores, and the Total Market Capitalisation excludes delisted entities. REITs are not included.
<hr>
• SECTOR SCORES •
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/410/original/2020-02-18_09-55-29.png?1581987489" class="editor-image img-responsive" data-smartkarma-image-id="118410"></figure><div class="content-caption">Source • Japan Analytics</div>
In the DETAIL Section below, we provide a detailed breakdown of our RRS Scoring for Sectors, Peer Groups and individual companies, highlighting this quarter's 'winners' and 'losers'. The chart above shows a  seventeen-year 'timeline' of the cap-weight-aggregated Sector RRS Scores and the ebbs and flows around the business cycles. The Metals Sector is the most volatile on the downside and has yet to 'bottom' this cycle. Technology Hardware appears to have already rebounded; however, Covid-19 suggests this Sector may relapse. On the upside, the Information Technology Sector has replaced the Internet and Telecoms Sectors as the contra-cyclical 'champion'. 
</li>
</ul>

Source • Japan AnalyticsTHREE-YEAR LOW - With Bridgestone (5108 JP)'s results and revision now added, our final tally for this season is a 196 basis point decline in our Results Sore - the lowest since March 2017.  In contrast, the Forecast/Revision Score reached a three-month high as the 470 companies with December year-ends put an optimistic gloss on their medium-term outlook. As we have noted in our recent daily roundups, a normal precondition for a cycle low is for the Forecast/Revision Score to rise above the Results Score. Forecast/Revision Score peaks and troughs usually occur one to two quarters ahead of those for the Results Score.  Covid-19's impact will likely see the 2016 'playbook' repeated next quarter with a lower Results Score and a 'sideways' Forecast/Results Score. The Results Score cycle low point will be reached with the mostly-interim results to be released in six months. Source • Japan AnalyticsLEADING INDICATOR - By including several momentum factors into our Scoring (see below), we can provide a better indication of future business conditions. Indeed there is a 0.83 correlation between the Cabinet Office's Business Condition Leading Indicator and the Forecast/Revision Score. Reported earnings, as well as company forecasts, are lagging indicators and, as shown in Part 1 of this Insight. Both data series peaked one year after our Scores and the market peaked in early 2018. SCORING METHODOLOGY - For those new to these Insights, we briefly recap our scoring methodology below:-
Results Scores are calculated using the most recent eight quarters of company data for Revenues, Operating Income and Operating Margin and, for each, measure the rate, degree and consistency of change. The Results Score has a maximum of +30 and a minimum of -30 for each period. Our data series commences from the time a particular company issues quarterly results. The sample size becomes significant from March 2005.
The Forecast/Revision Score is based on both Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This Score also has a maximum of +30 and a minimum of -30 for each period.  For this series, our data samples start from August 2008.
The combined Results &amp; Revision Score (RRS) is the average of the Results Score and the Forecasts/Revision Score.

All company Scores are then cap-weight-aggregated into Sector, Peer Group and Market Composite Scores for which the seventeen-year monthly and two-year daily track records are shown above. Only currently listed-companies are covered in the aggregate Scores, and the Total Market Capitalisation excludes delisted entities. REITs are not included.

• SECTOR SCORES •
Source • Japan Analytics
In the DETAIL Section below, we provide a detailed breakdown of our RRS Scoring for Sectors, Peer Groups and individual companies, highlighting this quarter's 'winners' and 'losers'. The chart above shows a  seventeen-year 'timeline' of the cap-weight-aggregated Sector RRS Scores and the ebbs and flows around the business cycles. The Metals Sector is the most volatile on the downside and has yet to 'bottom' this cycle. Technology Hardware appears to have already rebounded; however, Covid-19 suggests this Sector may relapse. On the upside, the Information Technology Sector has replaced the Internet and Telecoms Sectors as the contra-cyclical 'champion'. 



🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores

<ul>
<li>
Weak Set of Results:Singapore Exchange (SGX.SP) reported FY 2Q20 earnings of SGD 99 mn - down 13% linked quarter  - missing consensus by some 14% due largely to weaker derivative volumes - primarily A50 contracts.</li>
<li>China Derivative Competition: Last year, some 40% of derivative volume were comprised of A50 contracts. Hong Kong Exchanges and Clearing's (388.HK) [HKEX] launch of the MSCI China Equity Index A-share futures could very well cannibalize SGX's derivative earnings over time.  </li>
<li>Scientific Beta Transaction: SGX also announced a small acquisition for a 93% stake in Scientific Beta for EUR 186 mn or SGD 280 mn. Scientific Beta is an index provider specializing in smart beta strategies, and will add scale to SGX's markets data and connectivity business. We are hopeful that SGX will stay away from the HKEX-style transformational transactions.   </li>
</ul>



Weak Set of Results:Singapore Exchange (SGX.SP) reported FY 2Q20 earnings of SGD 99 mn - down 13% linked quarter  - missing consensus by some 14% due largely to weaker derivative volumes - primarily A50 contracts.
China Derivative Competition: Last year, some 40% of derivative volume were comprised of A50 contracts. Hong Kong Exchanges and Clearing's (388.HK) [HKEX] launch of the MSCI China Equity Index A-share futures could very well cannibalize SGX's derivative earnings over time.  
Scientific Beta Transaction: SGX also announced a small acquisition for a 93% stake in Scientific Beta for EUR 186 mn or SGD 280 mn. Scientific Beta is an index provider specializing in smart beta strategies, and will add scale to SGX's markets data and connectivity business. We are hopeful that SGX will stay away from the HKEX-style transformational transactions.   


<ul>
<li>
Trying to Dress British, But Not Thinking Yiddish: As if there wasn't enough to worry about on the Hong Kong home front, there is a clear obsession with all things London when it comes to HKEx's acquisition strategy. Not only that, management seemingly has close to zero financial acumen when it comes to these massive deals.</li>
<li>
Other Factors:  The IPO pipeline remains robust at around 200 deals. The launch of HKEx MSCI China A index futures with CSRC is ongoing. The Ronghui Tongjin acquisition (51%-owned) has enabled HKEx to add speed and further automate its processes.</li>
</ul>



Trying to Dress British, But Not Thinking Yiddish: As if there wasn't enough to worry about on the Hong Kong home front, there is a clear obsession with all things London when it comes to HKEx's acquisition strategy. Not only that, management seemingly has close to zero financial acumen when it comes to these massive deals.

Other Factors:  The IPO pipeline remains robust at around 200 deals. The launch of HKEx MSCI China A index futures with CSRC is ongoing. The Ronghui Tongjin acquisition (51%-owned) has enabled HKEx to add speed and further automate its processes.


HKEx - Management's Deal Obsession Is a Major Distraction

Japan

Japan Exchange Group Inc is the holding company created through the merger of Tokyo Stock Exchange Group, Inc and Osaka Securities Exchange Co., Ltd. The group provides and operates a marketplace for the trading of equities, futures, and options. The Group manages the trading, as well as administers listed stocks and registered members.

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Japan Exchange Group (8697 JP)

JAPAN DELTA I - The BOJ Ups ETF Buying

Enhancement of Monetary Easing in Light of the Impact of the Outbreak of the Novel Coronavirus (COVID-19) Global financial and capital markets...

Travis Lundy

HKEx - Management's Art of Saying Nothing

Weak Quarter:Hong Kong Exchanges and Clearing (388.HK) [HKEx] reported EPS results of HKD 1.57 - down 11% linked quarter. The weak results are...

Thomas J. Monaco

🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores

THREE-YEAR LOW - With Bridgestone (5108 JP)'s results and revision now added, our final tally for this season is a 196 basis point decline in our...

Campbell Gunn

Singapore Exchange - Momentum Is Slowing

Weak Set of Results:Singapore Exchange (SGX.SP) reported FY 2Q20 earnings of SGD 99 mn - down 13% linked quarter - missing consensus by some 14%...

Thomas J. Monaco

HKEx - Management's Deal Obsession Is a Major Distraction

Trying to Dress British, But Not Thinking Yiddish: As if there wasn't enough to worry about on the Hong Kong home front, there is a clear...

Thomas J. Monaco

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