This will very likely go a long way towards making it a more traded index, with greater pricing power and greater ability to capture overnight sentiments. The Japan Exchange Group is already trying to make the index more accessible to a wider selection of investors and traders as they are listing e-minis, or index contracts valued at index times 100 yen, rather than the normal 10 000 yen multiplier. At a value of 12 725 on the JPX Nikkei 400, it would thus mean about 1 272 500 yen for one notional lot. What does the analysis of the market, growth prospects and positioning information look like? Hit the jump for more!
Market analysis and expectations:
More quantitative analysis by Mizuho Securities suggests that the futures will really help money management on the JPX Nikkei 400, given that the opening times allows positioning to be taken on the index even when the spot market is closed, which will be particularly useful as the index constituent stocks may change rapidly on new derivatives and investment decisions. As for how much money is following the index at the moment, Bloomberg lists slightly less than 500 billion yen split between ETFs, actively managed funds and passive funds invested in by the GPIF. The GPIF figure however is from March, so my expectation is that the investments in the index can have close to doubled given that the GPIF has been looking for a mandate to expand equity holdings for a long time, and the reform pressures on corporate boards have been growing as the JPX Nikkei 400 has gotten progressively more important.
Foreign weekly inflows into the Japanese stock market have averaged roughly 1 trillion yen over the last few weeks, and the GPIF remaining rebalancing into Japanese equities alone is close to 8.6 trillion yen, with a large amount of money managers trying to front-run it. There is clearly a lot of potential for the increased exposure to stocks through investments in the JPX Nikkei 400 to really balloon, but it is really hard to tell exactly by how much. However, against a backdrop of 18 trillion yen in TOPIX passive funds, that puts my estimation of JPX Nikkei 400 influence at roughly 1/30 of the TOPIX passive funds at present.
As money flowing in is likely to be more heavily focused on the JPX Nikkei 400, I think this is the absolute minimum of the added funds the index will see, and a baseline estimation is for about 6% of inflows to be going to the new index. That would put my baseline for the GPIF contributions at 500 billion more from the GPIF alone, and roughly a weekly baseline investment interest from foreign investors at 40 billion yen. (1 trillion yen times 6% scaled down by 2/3 in back-of-the-envelope calculation since not all investments into Japanese stocks follow the TOPIX weighting.) So in the coming year I would expect an additional nearly 2.5 trillion yen starting to track this index, counting both domestic pension funds, the GPIF, other money managers, and these other money managers making up for a probable loss in foreign investor inflows.
Having futures on this index also means that the BOJ, GPIF and foreign investors can take positions in these contracts much easier and with less of a market impact. The “mini” nature of the contract lots also allows the average Japanese investor to go in and ride the relative outperformance on the JPX Nikkei 400 relative the Nikkei 225 or the TOPIX. It could be negative for the other indices as there will be more focus on investments on stocks that are weighted more heavily in the JPX Nikkei 400, making continued greater performance a sort of self-fulfilling prophecy. Short Nikkei 225, long Nikkei 400 trades taken on Tuesday?
Japanese analysts, however, seem to love making inaccurate observations. At the end of the Bloomberg article, it is mentioned that futures trading on the Nikkei 225 and TOPIX started in September 1988, which happened to be close to the 1989 fall. I don’t know whether to laugh or cry about this, since obviously a housing bubble bursting had nothing to do with it… Here’s the long and short of it:
- Futures helps the market operate more efficiently, and makes it easier to both speculate and hedge.
- By definition, doing this might cause more volatility (speculators) or less (hedging) but it will thus respond to the needs of the market. Access to short positioning without forcing the market down is a pretty welcome thing for larger players with a longer strategy, and shorting is inherently more speculative than going long.
- More access for more people to position and really allowing the big players (GPIF and those benchmarking to it, and the BOJ) to go in will mean that this index will gain further importance, and force more shareholder friendliness. I have a very hard time putting the logical pieces together as to why this would force stock markets lower, or reduce rallies.
- Increasing dividends will mean greater detraction on the futures spread adjustment, so when dividends are increasing, and this index picks out the most dividend-increasing companies, the futures spread will be lower. Going long the JPX Nikkei 400 and short its futures is thus one of the best leveraging strategies for betting on Japanese corporate reform, and a reverse bet probably a good way to position oneself for corporate stagnation.