NIKKEI STOCK AVERAGE

Prepared By:

Mohit Punjani

Nalini Jain

Nikita Suri

Nitin Bhalla

Nishit Mamgain

Prayag Taneja

CONTENTS

ABOUT

SELECTION CRITERIA

WEIGHING AND COMPONENTS

SECTOR WEIGHTAGES

CHANGES IN SECTOR WEIGHTAGES

SECTOR BALANCE

TOP COMPONENTS

CRITERIA FOR CHANGES INC COPMONENT

REBALANCING OF COMPONENTS

CALCULATION IF INDEX

CALCULATION OF DIVISOR

CRITICISM

SENTIMENT INDEX

EFFECT OF GLOBAL ECONOMY

PE RATIO

COMPARISON

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 Japan's 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

Economic Bubble

Chart

Post 1989

Nearly 2 lost decades

Selection Criteria

• Assessing liquidity throughTrading volumePrice 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

Weights

Industrial 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 Balance

36 sectors now consolidated in 6 broad categoriesBroad Sector Sub Sectors

Technology Pharmaceuticals, Electrical Machinery, Automobiles, Precision Machinery, Telecommunications

Financials Banks, Miscellaneous Finance, Securities, Insurance

Consumer Goods Marine products, Food, Retail, Services

Materials Mining, Textiles, Paper & Pulp, Chemicals, Oil, Rubber, Ceramics, Steel, Nonferrous metals, Trading House

Capital Goods/Others Construction, Machinery, Shipbuilding, Transportation Equipment, Miscellaneous Manufacturing, Real estate

Transportation and Utilities

Railroads & Buses, Trucking, Shipping, Airlines, Warehousing, Electric Power, Gas.

Top Components

Current Volume Leaders Volume

1.Mizuho Financial Group, Inc. 94,747,300

2.Hitachi, Ltd. 62,117,000

3.Mitsubishi UFJ Financial Group, Inc. 43,885,300

4.Nippon Yusen K.K 31,940,000

5.Toshiba Corp. 30,726,000

Market Cap Leaders Market Cap. (Yen)

1.Toyota Motor Corp. 8,320,018

2.NTT Docomo, Inc. 5,857,830

3.Nippon Telegraph And Telephone Corp. 5,014,918

4.Mitsubishi UFJ Financial Group, Inc. 4,579,363

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

Average Stock Price = 1800/3 = 600

Now, 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

Stock Stock Price ¥(After Par Value)

Stock Price ¥(After Par Value Adj)

A 400 400

B 500 500

C 900 450

Calculation of divisor

• Change in Constituents - Merger

Average 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

Stock Stock Price ¥ Stock Price ¥

A 400 -

B 500 500

C 900 900

D - 1000

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

Criticism

Stock 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 Nikkei

Events 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 Nikkei

Yen• 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 Countries

17-20

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

1984-1995

2000

2008

2009

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