NIKKEI STOCK AVERAGE Prepared By: Mohit Punjani Nalini Jain Nikita Suri Nitin Bhalla Nishit Mamgain Prayag Taneja
CONTENTSABOUTSELECTION CRITERIAWEIGHING AND COMPONENTSSECTOR WEIGHTAGESCHANGES IN SECTOR WEIGHTAGESSECTOR BALANCETOP COMPONENTSCRITERIA FOR CHANGES INC COPMONENTREBALANCING OF COMPONENTSCALCULATION IF INDEXCALCULATION OF DIVISORCRITICISMSENTIMENT INDEXEFFECT OF GLOBAL ECONOMYPE RATIOCOMPARISON
About• The Nikkei 225/Nikkei/ Nikkei index/ Nikkei Stock Average is a stock market index for the Tokyo Stock Exchange (TSE).• It is a price-weighted average (the unit is yen)• Reflects the ex-rights-adjusted average stock price.• Comprises of Japans top 225 blue-chip companies - Most actively traded - Highly Liquid - Listed in the 1st section of TSE• Market Cap as on 9th Sep 2011 - $ 2 Trillion – much lower than last year
About• The Nikkei 225 began to be calculated on September 7, 1950, retroactively calculated back to May 16, 1949• Daily basis by the newspaper Nihon Keizai Shimbun (Nikkei)• Updated every 15 seconds during trading sessions• Periodic review of Components once a year in October• No stock exchange of it own -derivates traded on OSE,SE,CME
Selection Criteria• Assessing liquidity through Trading volume Price Fluctuation to Volume• 450 most liquid issues are chosen –reasonable representation of population• All issues ranked 451 and below are automatically excluded• 75 most liquid issues (one-third of the component count of the Nikkei average) be included in the index.
Weighing & Components• Designed to reflect the overall market, there is no specific weighting of industries.• Equal weighting based on a par value of ¥ 50 is given to stocks• Effective Weighting of individual stocks and the divisor is affected by –: Stock splits Removals and additions of constituents
Sector Weightages Sectors WeightsIndustrial Goods & Services 26%Retail 11%Technology 11%Personal & Household Goods 10%Health Care 9%Automobiles & Parts 7%Chemicals 4%Food & Beverage 4%Financial Services 4%Basic Resources 3%Construction & Materials 2%Telecommunications 2%Media 2%Travel & Leisure 2%Banks 1%Insurance 1%Utilities 1%Oil & Gas 0%Grand Total 100% Figures as on Nov 2010
Changes in sector weightages overtime Year Major industrial sectors 1953-1965 Manufacturing, Construction, Infrastructure 1965-1970 Manufacturing, Automobiles, Shipping 1970-1980 Technology, R&D 1970-1973 Retail, finance, Service, Real Estate 1986 Expansion of companies Output
Sector Balance36 sectors now consolidated in 6 broad categories Broad Sector Sub SectorsTechnology Pharmaceuticals, Electrical Machinery, Automobiles, Precision Machinery, TelecommunicationsFinancials Banks, Miscellaneous Finance, Securities, InsuranceConsumer Goods Marine products, Food, Retail, ServicesMaterials Mining, Textiles, Paper & Pulp, Chemicals, Oil, Rubber, Ceramics, Steel, Nonferrous metals, Trading HouseCapital Goods/Others Construction, Machinery, Shipbuilding, Transportation Equipment, Miscellaneous Manufacturing, Real estateTransportation and Railroads & Buses, Trucking, Shipping, Airlines,Utilities Warehousing, Electric Power, Gas.
Top Components Market Cap. Market Cap Leaders (Yen) Current Volume Leaders Volume 1.Toyota Motor Corp. 8,320,0181.Mizuho Financial Group, Inc. 94,747,300 2.NTT Docomo, Inc. 5,857,8302.Hitachi, Ltd. 62,117,000 3.Nippon Telegraph And3.Mitsubishi UFJ Financial 5,014,918 43,885,300 Telephone Corp.Group, Inc. 4.Mitsubishi UFJ Financial4.Nippon Yusen K.K 31,940,000 4,579,363 Group, Inc.5.Toshiba Corp. 30,726,000 5.Canon Inc. 4,441,432
Criteria for changes in components• Significant decline in liquidity• Delisting• Changes in industrial structure• Changes in market environment
Rebalancing of Components Criteria Companies Deletion due to acquisition Sanyo Electric Co. , Panasonic Electric Works Deletion due to bankruptcy Kanebo Ltd Additions Yaskawa Electric Corp•Components are added at an interval of 2 days
Index Calculation – Dow Jones Method• Nikkei 225 takes just the share price and its predetermined par value.• Stocks with an irregular par value have their share price converted to a 50 yen par value base.• A divisor is then used to ensure continuity in the index to ensure that events such as stock splits, dividends and changes in constituents do not distort the index.• The divisor value is published along with the price values of the Nikkei constituents – 24.996
Calculation of divisor• Stock Splits – C Split 1 to 2 Stock Stock Price ¥(After Stock Price ¥(After Par Value) Par Value Adj) A 400 400 B 500 500 C 900 450Average Stock Price = 1800/3 = 600Now, Average Stock Price = 1350/2.25 = 600So the devisor changes to 2.75New divisor = ∑Post Stock split Average _____________________ X Old Divisor ∑ Pre Stock Split Average
Calculation of divisor• Change in Constituents - Merger Stock Stock Price ¥ Stock Price ¥ A 400 - B 500 500 C 900 900 D - 1000Average Stock Price = 1800/3 = 600So the devisor changes to 4Now, Average Stock Price = 2400/4 = 600New divisor = ∑Post Stock split Average _____________________ X Old Divisor ∑ Pre Stock Split Average
Criticism• Downward bias for growth companies• Large companies will lose importance due to splits• Weight age bias v/s domination• Stock has to be rebalanced from time to time
CriticismStock markets are weak even though economy is strong
Sentiment Index• Nikkei driven more by sentiments• Strongly affected by events outside Japan• Political support or non-support from Japanese government• Value of the yen.
Effect of Global Economy on NikkeiEvents outside Japan• Wars, droughts, and other events• Spending in the U.S. increases lead to Japanese stocks increase• Small decrease in American jobs – 1% decline in Nikkei• Loss of jobs means less money to buy new cars, printers, computers, and other items
Effect of Global Economy on NikkeiYen• Yen strongest in 15 years• Pressure on exporters• Negative impact on stock market
High PE Ratio in spite of low returns• Country Shiller PE India 25 China 38 Developed 17-20 Countries Japan 37* *Japan lost a decade due to deflation PE Should Be Lowest
Reasons for a high PE Ratio 3 year PE Chart Analysis•The earnings of Japanese companies fell faster than their stock prices – sentiment• Near zero interest rates
Comparison with DJIA• Known as the "Nikkei Dow Jones Stock Average" from 1975 to 1985• Exclusive rights given by Dow Jones & Co. to use name and method• Negative strong correction• Similarity in rises and falls• Two weeks on the DJW chart is equivalent to one on the Nikkei. Since 2001 they move in tandem
Will Japanese Stocks be rediscovered?• Cheapest among the developed markets• Dividend payments are rising in Japan• Corporate performance has improved• The yen is strong against the dollar.• Strengthening of Yen• Increase in saving rates