Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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 "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. <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></section>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 <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>.<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>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 much more interesting reading.  Appendix 5 and Chart 12 are the parts you want to read.The hypotheses and results are described here.<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>There are a couple of other side conclusions but the base understanding is...<div class="content-highlight">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.  </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>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.

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

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

Major global indexes (MSCI ACWI, ACWI ex-US, EM, and EAFE) continue to trend higher and are devoid of bearish inflections. Additionally, the US dollar (DXY) is likely headed lower, something we view as a positive risk-on signal for global equities. As a result, we remain bullish and we continue to recommend adding exposure on pullbacks.

Major global indexes (MSCI ACWI, ACWI ex-US, EM, and EAFE) continue to trend higher and are devoid of bearish inflections. Additionally, the US dollar (DXY) is likely headed lower, something we view as a positive risk-on signal for global equities. As a result, we remain bullish and we continue to recommend adding exposure on pullbacks.

Japan Breaking Out; EM Remains Leadership

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.

Harmonic Drive reported middling results as revenue got back on track, increasing 11.1% QoQ and the company revised guidance upwards from a -¥800 operating loss to a ¥1bn operating profit (revenue guidance was raised from ¥35bn to ¥37bn). Valuations point to overextended expectations for the stock, however, and with the news of Nabtesco selling its stake it will be interesting to watch the market’s reaction to relatively benign results. This is especially so given the 9% drop in Daifuku’s share price today despite results which, while slightly below consensus, were also middling.

Harmonic Drive reported middling results as revenue got back on track, increasing 11.1% QoQ and the company revised guidance upwards from a -¥800 operating loss to a ¥1bn operating profit (revenue guidance was raised from ¥35bn to ¥37bn). Valuations point to overextended expectations for the stock, however, and with the news of Nabtesco selling its stake it will be interesting to watch the market’s reaction to relatively benign results. This is especially so given the 9% drop in Daifuku’s share price today despite results which, while slightly below consensus, were also middling.

Harmonic Drive – Recovery Coming Through but Will This Be Another Daifuku?

Yesterday, reducing gear maker <a href="https://www.smartkarma.com/entities/nabtesco-corp" target="_blank" data-smartkarma-citation="entities:13176:1" rel="noopener">Nabtesco Corp (6268 JP)</a> announced that it would dissolve its cooperative relationship with the specialist maker of the smallest reducing gears <a href="https://www.smartkarma.com/entities/harmonic-drive-systems-inc" target="_blank" data-smartkarma-citation="entities:10238:1" rel="noopener">Harmonic Drive Systems (6324 JP)</a> which it had formed in 2008. This means they will dissolve their capital relationship too. Nabtesco has heretofore owned 19.03% since well over a decade ago, and also owns share options which were purchased in 2018 when harmonic Drive last issued shares. There is a <a href="https://www.nabtesco.com/pdf/39b194f5f075a6fc8bf15eb51036f2a6.pdf" target="_blank" rel="noopener">presentation</a>.This ends the "hopes" of many that eventually Nabtesco would buy out Harmonic Drive Systems.Nabtesco sold half their stake in the company to Nomura, will keep the other half to sell at a later date, will sell the options back to HDS, and due to the fact that HDS will no longer be an equity-method affiliate, Nabtesco will report a significant gain in Q1, currently estimated at ¥130.6bn, and approximately ¥100bn after tax, if the shares are sold at ¥8,000/share. Nabtesco will also sell its 49% ownership in a JV in the US with HDS' US subsidiary. There are some details worth looking at here. More below the fold.

Yesterday, reducing gear maker Nabtesco Corp (6268 JP) announced that it would dissolve its cooperative relationship with the specialist maker of the smallest reducing gears Harmonic Drive Systems (6324 JP) which it had formed in 2008. This means they will dissolve their capital relationship too. Nabtesco has heretofore owned 19.03% since well over a decade ago, and also owns share options which were purchased in 2018 when harmonic Drive last issued shares. There is a presentation.This ends the "hopes" of many that eventually Nabtesco would buy out Harmonic Drive Systems.Nabtesco sold half their stake in the company to Nomura, will keep the other half to sell at a later date, will sell the options back to HDS, and due to the fact that HDS will no longer be an equity-method affiliate, Nabtesco will report a significant gain in Q1, currently estimated at ¥130.6bn, and approximately ¥100bn after tax, if the shares are sold at ¥8,000/share. Nabtesco will also sell its 49% ownership in a JV in the US with HDS' US subsidiary. There are some details worth looking at here. More below the fold.

End of An Era: Nabtesco and Harmonic Drive Dissolve Their Alliance - Event Lost, Pressure On

While a more cautious outlook is appropriate, as long as $77 holds (the September lows) we are constructive and would be buyers on a pullback. A move below $77 would start to get very concerning, and would leave $75 and the 200-day MA as last-ditch support. Considering the recent pullback we want to be sticking with areas that have continued to outperform in spite of recent broad market weakness. For that we look to the following leadership Sectors: Technology, Consumer Discretionary, Manufacturing, Materials, and Transportation

While a more cautious outlook is appropriate, as long as $77 holds (the September lows) we are constructive and would be buyers on a pullback. A move below $77 would start to get very concerning, and would leave $75 and the 200-day MA as last-ditch support. Considering the recent pullback we want to be sticking with areas that have continued to outperform in spite of recent broad market weakness. For that we look to the following leadership Sectors: Technology, Consumer Discretionary, Manufacturing, Materials, and Transportation

Japan

Nabtesco Corporation manufactures Aircraft and Hydraulic products, Precision equipment, and transportation equipment. The Company's products include landing gear system for aircrafts, railroad vehicle brake system, and precision reduction gears for industrial robots.

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Nabtesco (6268 JP)

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

The BOJ has announced a change in ETF Buying Program Parameters. The study/review they did is required reading to understand how they might buy...

Travis Lundy

Japan Breaking Out; EM Remains Leadership

Major global indexes continue to trend higher and are devoid of bearish inflections. As a result, we remain bullish and we continue to recommend...

Vermilion Research

Harmonic Drive – Recovery Coming Through but Will This Be Another Daifuku?

Harmonic Drive posted reasonable results and revised up guidance to more reasonable levels, but the real driver for the stock could be the sale of...

Mio Kato

End of An Era: Nabtesco and Harmonic Drive Dissolve Their Alliance - Event Lost, Pressure On

Harmonic Drive and Nabtesco have decided to dissolve their partnership and Nabtesco will sell the 19% it owns in the market over time. This means...

Travis Lundy

Cautiously Optimistic on Global Equities

We are constructive on global equities and would be buyers on a pullback. A move below $77 would start to get very concerning, and would leave $75...

Vermilion Research

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