Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

The September 2021 Nikkei 225 Rebalance was the first under the new rules. It was discussed in <a href="https://www.smartkarma.com/insights/2021-nikkei-225-rebalance-nintendo-murata-keyence-in-nisshinbo-toyo-seikan-skupper-out" target="_blank" data-smartkarma-citation="insights:57008" rel="noopener">2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, 'Skupper' OUT</a> about three weeks ago when announced. The ADDITIONS and DELETIONS were announced on 6 September for implementation on 30 September at the close. There was, ex-ante, quite a bit to buy, and not a huge amount to sell from the explicit deletions, though there is a little to sell on a down-weight to the Price Adjustment Factor on <a href="https://www.smartkarma.com/entities/sompo-holdings-inc" target="_blank" data-smartkarma-citation="entities:632:1" rel="noopener">Sompo Holdings (8630 JP)</a> and there was - on an ex-ante basis - something like US$4.8bn of the other 221 names to sell. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/054/original/N225+Sep+2021+Adds+Deletes.png?1632731028" class="editor-image img-responsive" data-smartkarma-image-id="232054"></figure></section>That was then. Since then, we have had 13 trading days to build up new pre-positioning or unwind previous pre-positioning. And we are have a run-up to the trade on Thursday at the close. An accompanying insight will briefly discuss the OTHER delta trade which interferes with the smooth flow of this event. More below.

The September 2021 Nikkei 225 Rebalance was the first under the new rules. It was discussed in 2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, 'Skupper' OUT about three weeks ago when announced. The ADDITIONS and DELETIONS were announced on 6 September for implementation on 30 September at the close. There was, ex-ante, quite a bit to buy, and not a huge amount to sell from the explicit deletions, though there is a little to sell on a down-weight to the Price Adjustment Factor on Sompo Holdings (8630 JP) and there was - on an ex-ante basis - something like US$4.8bn of the other 221 names to sell. That was then. Since then, we have had 13 trading days to build up new pre-positioning or unwind previous pre-positioning. And we are have a run-up to the trade on Thursday at the close. An accompanying insight will briefly discuss the OTHER delta trade which interferes with the smooth flow of this event. More below.

September 2021 Nikkei 225 Rebal With 3 Days Left

Every year (usually in the beginning of September), the Nikkei Inc Index team conducts an annual review of the major price-weighted Nikkei indices - the most important being the Nikkei 225 Average - and adds and subtracts constituents according to the Rules.
Today, they announced the 2021 version of the changes (<a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_1.pdf" target="_blank" rel="noopener">announcement</a>, <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_3.pdf" target="_blank" rel="noopener">PAF changes</a>).
Below is Some Background. If you want to skip ahead to the juicy analysis, you can jump ahead to the Changes Announced section just below, and then more below the fold.
<h3>Some Background</h3>
The Nikkei 225, well-known globally as "the Nikkei" is a price-weighted index, originally started nearly 70 years ago as an average of a selected number of stocks listed on the TSE First Section. Later, it became 225 members. 
Because it is price-weighted, and because for a long time it made no divisor adjustments for stock splits (so when a stock split 2:1 its weight fell by half because price fell by half and trackers had to sell half their shares in that stock), and the price multiplier was determined by the par value of a company, then they later they started adjusting for splits, stocks which are old, never split, AND have a high price end up having a high weight in the index. 
There was a huge reshuffle in April 2000 when the Nikkei decided that the system needed rebalancing to include more tech, so they changed the Rules. They pushed 30 names out and 30 names in, and the 30 names added were 50% of the new index. 
Twenty one years after the prior change in methodology, this past May 10 the Nikkei Inc Index Team announced new changes to the Rules. There was a <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_1.pdf" target="_blank" rel="noopener">proposal</a>, with an <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_3.pdf" target="_blank" rel="noopener">FAQ</a>, and <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_2.pdf" target="_blank" rel="noopener">supplemental data</a>. On 5 July, the Nikkei confirmed the proposal with a new <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210705E_1.pdf" target="_blank" rel="noopener">Guidebook</a>.
When I wrote about this on 10 May in <a href="https://www.smartkarma.com/insights/after-20yrs-nikkei-225-proposes-minor-impact-rule-changes-nintendo-disappointment" target="_blank" data-smartkarma-citation="insights:51277" rel="noopener">After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?)</a> I said I thought the changes disappointing. There are real problems with the index and this did not do much; the changes are evolutionary rather than revolutionary, with the only interesting change being that constituents are added with a weight no greater than 1%. If the normal price adjustment factor would allow a constituent to enter at a weight greater than 1%, the Price Adjustment Factor (base 1) is lowered in increments of 0.1 so that the deemed inclusion weight on Base Date (end of July) is no more than 1%. There is no change to the idea that the Nikkei Index Team can override their rankings at any time as they see fit.
Because the Nikkei Index Team had let the sector balances and rankings slide quite a bit over the years (not adding "obvious" names and not deleting names which should probably have been deleted, and not rebalancing the sectors as the rules say they should), the possibility was that some names like <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a> and similar high-price-low-share-count names which "deserved" to be included were not simply because their very high price would create undue impact (it was undue impact and the lack of incremental float for high-weight low-share-count names which caused the BOJ to lower, then eventually cease their buying of Nikkei 225 ETFs). This rule on capping inclusions at 1% would go a ways to mitigating that problem so that would allow the Nikkei to add previously un-addable names. Expectations were high on a group of names, with <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a>, <a href="https://www.smartkarma.com/entities/keyence-corp" target="_blank" data-smartkarma-citation="entities:3077:1" rel="noopener">Keyence Corp (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a>, and probably <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a>, with the latter two likely to create some real froth if actually selected. 
<h2>The Changes Announced</h2>
Today after the close, the Nikkei Index Team announced the following changes to the Nikkei 225 Average as a result of the Annual Review:
<section class="figure">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/056/original/Screenshot+2021-09-06+at+5.11.07+PM.png?1630919479" class="editor-image img-responsive" data-smartkarma-image-id="228056"></figure>
</section>
<section class="figure">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/055/original/Screenshot+2021-09-06+at+5.06.02+PM.png?1630919179" class="editor-image img-responsive" data-smartkarma-image-id="228055"></figure>

</section>
The changes will be made on the last trading day of September, at the close. I expect to see $10bn trade on that day.
The new rules allow the Nikkei Index team to not do a lot to the sector mix if the additions are made because of "High Liquidity" because while the sector mix would normally mean more than three deleted, the new rules cap changes at 3 per annual rebalance (which is not enough).
As noted above, <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a> and <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a> were among names which were expected as possible inclusions and therefore a certain amount of pre-positioning may be in place. They may get somewhat hurt tomorrow.
<div class="content-highlight">
There are a LOT of moving parts here. There are 3 ADDs, 3 DELETIONS, 1 Price Adjustment Factor moved sharply higher and one moved somewhat lower (a list of all the PAFs announced by the Nikkei is <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_3.pdf" target="_blank" rel="noopener">here</a>), then there are another 220 stocks which will see selling on 30 September at the rebalance. 
</div>
For more detailed analysis of the stocks, their positioning, how much to buy, etc, please read on.
<hr>
For more about passive tracking in Japan, please refer to <a href="https://www.smartkarma.com/insights/japan-passive-who-owns-what-2021" target="_blank" data-smartkarma-citation="insights:55008" rel="noopener">JAPAN PASSIVE: Who Owns What 2021?</a>

Every year (usually in the beginning of September), the Nikkei Inc Index team conducts an annual review of the major price-weighted Nikkei indices - the most important being the Nikkei 225 Average - and adds and subtracts constituents according to the Rules.
Today, they announced the 2021 version of the changes (announcement, PAF changes).
Below is Some Background. If you want to skip ahead to the juicy analysis, you can jump ahead to the Changes Announced section just below, and then more below the fold.
Some Background
The Nikkei 225, well-known globally as "the Nikkei" is a price-weighted index, originally started nearly 70 years ago as an average of a selected number of stocks listed on the TSE First Section. Later, it became 225 members. 
Because it is price-weighted, and because for a long time it made no divisor adjustments for stock splits (so when a stock split 2:1 its weight fell by half because price fell by half and trackers had to sell half their shares in that stock), and the price multiplier was determined by the par value of a company, then they later they started adjusting for splits, stocks which are old, never split, AND have a high price end up having a high weight in the index. 
There was a huge reshuffle in April 2000 when the Nikkei decided that the system needed rebalancing to include more tech, so they changed the Rules. They pushed 30 names out and 30 names in, and the 30 names added were 50% of the new index. 
Twenty one years after the prior change in methodology, this past May 10 the Nikkei Inc Index Team announced new changes to the Rules. There was a proposal, with an FAQ, and supplemental data. On 5 July, the Nikkei confirmed the proposal with a new Guidebook.
When I wrote about this on 10 May in After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?) I said I thought the changes disappointing. There are real problems with the index and this did not do much; the changes are evolutionary rather than revolutionary, with the only interesting change being that constituents are added with a weight no greater than 1%. If the normal price adjustment factor would allow a constituent to enter at a weight greater than 1%, the Price Adjustment Factor (base 1) is lowered in increments of 0.1 so that the deemed inclusion weight on Base Date (end of July) is no more than 1%. There is no change to the idea that the Nikkei Index Team can override their rankings at any time as they see fit.
Because the Nikkei Index Team had let the sector balances and rankings slide quite a bit over the years (not adding "obvious" names and not deleting names which should probably have been deleted, and not rebalancing the sectors as the rules say they should), the possibility was that some names like Nintendo Co Ltd (7974 JP) and similar high-price-low-share-count names which "deserved" to be included were not simply because their very high price would create undue impact (it was undue impact and the lack of incremental float for high-weight low-share-count names which caused the BOJ to lower, then eventually cease their buying of Nikkei 225 ETFs). This rule on capping inclusions at 1% would go a ways to mitigating that problem so that would allow the Nikkei to add previously un-addable names. Expectations were high on a group of names, with Nintendo Co Ltd (7974 JP), Keyence Corp (6861 JP), ZOZO Inc (3092 JP), and probably Oriental Land (4661 JP), with the latter two likely to create some real froth if actually selected. 
The Changes Announced
Today after the close, the Nikkei Index Team announced the following changes to the Nikkei 225 Average as a result of the Annual Review:







The changes will be made on the last trading day of September, at the close. I expect to see $10bn trade on that day.
The new rules allow the Nikkei Index team to not do a lot to the sector mix if the additions are made because of "High Liquidity" because while the sector mix would normally mean more than three deleted, the new rules cap changes at 3 per annual rebalance (which is not enough).
As noted above, ZOZO Inc (3092 JP) and Oriental Land (4661 JP) were among names which were expected as possible inclusions and therefore a certain amount of pre-positioning may be in place. They may get somewhat hurt tomorrow.

There are a LOT of moving parts here. There are 3 ADDs, 3 DELETIONS, 1 Price Adjustment Factor moved sharply higher and one moved somewhat lower (a list of all the PAFs announced by the Nikkei is here), then there are another 220 stocks which will see selling on 30 September at the rebalance. 

For more detailed analysis of the stocks, their positioning, how much to buy, etc, please read on.

For more about passive tracking in Japan, please refer to JAPAN PASSIVE: Who Owns What 2021? 

2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, 'Skupper' OUT

David Blennerhassett

Last Week in Event SPACE: Prosus/Naspers, Wilmar, Invesco Office, Boral, Honshu Chem, Crown Resorts

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

The Nikkei today released a market consultation on proposed changes to the <a href="https://www.smartkarma.com/entities/nikkei-225" target="_blank" data-smartkarma-citation="entities:22909:1" rel="noopener">Nikkei 225 (NKY INDEX)</a>. Most of the changes are minor and will have little to no impact on the index.The main changes proposed include capping the weight of new constituents in the index at 1% by using a Price Adjustment Factor, limiting the number of index changes at a periodic review to 3, and changing the index universe from stocks listed on TSE's 1st section to stocks that are listed on the Prime Market (post the reorganisation).Limiting the weight of the new constituents in the index at 1% will keep index turnover low and reduce the impact of passive buying on the inclusions.Limiting the Price Adjustment Factor to 1 decimal place will necessitate selling of <a href="https://www.smartkarma.com/entities/sompo-holdings-inc" target="_blank" data-smartkarma-citation="entities:632:1" rel="noopener">Sompo Holdings (8630 JP)</a> by passive funds if the proposals are implemented.The consultation closes on 13 June and comments can be submitted <a href="https://indexes.nikkei.co.jp/en/nkave/governance" target="_blank" rel="noopener">here</a>.Finally, the Nikkei thanks everyone's contribution to the consultation but clearly states that it will make a decision at its own discretion... thanks for sharing though!

The Nikkei today released a market consultation on proposed changes to the Nikkei 225 (NKY INDEX). Most of the changes are minor and will have little to no impact on the index.The main changes proposed include capping the weight of new constituents in the index at 1% by using a Price Adjustment Factor, limiting the number of index changes at a periodic review to 3, and changing the index universe from stocks listed on TSE's 1st section to stocks that are listed on the Prime Market (post the reorganisation).Limiting the weight of the new constituents in the index at 1% will keep index turnover low and reduce the impact of passive buying on the inclusions.Limiting the Price Adjustment Factor to 1 decimal place will necessitate selling of Sompo Holdings (8630 JP) by passive funds if the proposals are implemented.The consultation closes on 13 June and comments can be submitted here.Finally, the Nikkei thanks everyone's contribution to the consultation but clearly states that it will make a decision at its own discretion... thanks for sharing though!

Nikkei225 Market Consultation: Tweaks and Changes Proposed; Nikkei Will Use Its Own Discretion

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

Thematic (Sector/Industry)

*Texas Storms = Japan Risk:Insurers could suffer record 1Q20 catastrophic (CAT) losses after the historic State of Texas (and beyond) winter storm Uri, which crippled Texas’ electrical grid and caused extensive property damage. Most directly exposed would appear to be Sompo (~2%), and Tokio Marine (1%); and*Watch Your Reinsurance: The risk of this Uri event hitting reinsurance layers is quickly rising given the fluid events and the creep in losses. The situation looks to be quite dicey given the economic impact estimate of between USD 45-50 bn. Add this to Texas’ poor handling of COVID-19, and no doubt this CAT event will result higher bankruptcies across retail energy power companies, energy drillers, etc. which should be additive to reinsurance losses.

*Texas Storms = Japan Risk:Insurers could suffer record 1Q20 catastrophic (CAT) losses after the historic State of Texas (and beyond) winter storm Uri, which crippled Texas’ electrical grid and caused extensive property damage. Most directly exposed would appear to be Sompo (~2%), and Tokio Marine (1%); and*Watch Your Reinsurance: The risk of this Uri event hitting reinsurance layers is quickly rising given the fluid events and the creep in losses. The situation looks to be quite dicey given the economic impact estimate of between USD 45-50 bn. Add this to Texas’ poor handling of COVID-19, and no doubt this CAT event will result higher bankruptcies across retail energy power companies, energy drillers, etc. which should be additive to reinsurance losses.

Japan Insurers – Texas, Don’t Hold ‘Em

Japan

Sompo Holdings, Inc, is a holding company established through the integration of Sompo Japan Insurance Inc. and NIPPONKOA Insurance Company Limited. Through subsidiaries, the Company provides non-life insurance including marine, fire, and automobile, as well as life insurance.

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Sompo Holdings (8630 JP)

September 2021 Nikkei 225 Rebal With 3 Days Left

The September 2021 Nikkei 225 Rebalance has performed "as expected" for both the ADDs and the DELETEs. It appears that the DELETEs have seen...

Travis Lundy

2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, 'Skupper' OUT

The Nikkei 225 Rebalance is here. A small surprise in the ADDs. No surprises on the DELETEs. A couple of housekeeping changes, and 600 baskets to...

Travis Lundy

Last Week in Event SPACE: Prosus/Naspers, Wilmar, Invesco Office, Boral, Honshu Chem, Crown Resorts

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

Nikkei225 Market Consultation: Tweaks and Changes Proposed; Nikkei Will Use Its Own Discretion

There are a few big changes proposed to the Nikkei225 index methodology along with a few minor tweaks. Sompo (8630 JP) will be sold at the 2021...

Brian Freitas

Japan Insurers – Texas, Don’t Hold ‘Em

JAPAN INSURANCE: Insurers could suffer record 1Q20 catastrophic (CAT) losses after the Texas winter storm. Most directly exposed are Sompo (~2%)...

Thomas J. Monaco

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