ANALYSIS of the JAPANESE INDICES Analýza Japonských Indexů Bachelor Thesis
Total Page：16
File Type：pdf, Size：1020Kb
Masaryk University Faculty of Economics and Administration Field of study: Finance ANALYSIS OF THE JAPANESE INDICES Analýza japonských indexů Bachelor thesis Thesis supervisor: Author: doc. Ing. Martin SVOBODA, Ph.D. Sabina BINZARU Brno, 2014 Author’s name and surname: Sabina Binzaru Name of bachelor thesis: Analysis of the Japanese indices Department: Finance Bachelor thesis supervisor: doc. Ing. Martin SVOBODA, Ph.D. Year of defense: 2014 Annotation This bachelor thesis focuses on the Japanese stock indices, particularly on Nikkei 225 and TOPIX. The main goal of the thesis is to analyze the main characteristics of the previously mentioned indices, evaluate and compare their way of construction, regard the possibility of index investing and formulate recommendations on this issue. The thesis consists of four chapters; the first chapter makes an introduction to indices mentioning their history, fundamental uses and factors of relevance. The second chapter focuses on index construction taking into account weighting, calculation and adjustment methods. The third chapter briefly introduces Japanese stock indices and then analyzes and compares the chosen Japanese indices from different perspectives. The last chapter is aiming at describing index investment opportunities and risks and discovering and comparing index investing products that have Nikkei 225 and TOPIX as underlying. Anotace Tato bakalářská práce se zaměřuje na japonských akciových indexů, zejména na Nikkei 225 a TOPIX. Hlavním cílem práce je analyzovat základní charakteristiky výše uvedených indexů, hodnotit a porovnávat jejich způsob konstrukce, možnost investování do indexů a formulovat doporučení týkající se této problematiky. Práce se skládá ze čtyř kapitol; první kapitola je úvodem do indexů zmiňující jejich historii, základní použití a faktory které ovlivňují vypovídací schopnost indexu. Druhá kapitola se zaměřuje na konstrukce indexů berouce v úvahu způsob vážení a metody kalkulace a úpravy. Třetí kapitola stručně představí japonské akciové indexy a následně analyzuje a srovnává vybrané japonské indexy z různých pohledů. Poslední kapitola je zaměřená na popis investiční příležitosti a rizika investování do indexů a zjištění a srovnání investičních produktů, které mají Nikkei 225 a TOPIX jako podkladové aktivum. Keywords Index investing, Nikkei 225, TOPIX, Free-Float Value, Tokyo Stock Exchange Klíčová slova Indexové investování, Nikkei 225, TOPIX, Free-Float Value, Tokyo Stock Exchange Declaration I declare that I have been working on the thesis Analysis of the Japanese Indices individually under the supervision of doc. Ing. Martin Svoboda, Ph.D. and I have mentioned all the literary and other specialized sources in compliance with the legal regulations, internal regulation of Masaryk University and internal proceedings of Masaryk University and of the Faculty of Economics and Administration MU. Brno, April 10, 2014 ………………………………… Author’s signature Acknowledgements I would like to express my gratitude to doc. Ing. Martin SVOBODA, Ph.D. for all the time devoted to my thesis, for his valuable advice that has helped me to develop this work and for all the things taught during the Financial Markets course. I would also like to thank my Japanese teacher, Kohshi Hirayama for helping me to better understand the geopolitical and financial situation of Japan in the last centuries. Contents Introduction 8 Chapter 1 General index characteristics 9 1.1 Definition and short history 9 1.2 Fundamental uses of indices 10 1.3 Factors of relevance 11 Chapter 2 Index construction 12 2.1 Key criteria for an effective index 12 2.2 Index weighting methods 13 2.3 Index construction guidelines 14 2.4 Index adjustment 16 2.5 Free-Float Weight 17 Chapter 3 Japanese stock indices 18 3.1 Japanese stock indices 18 3.2 Nikkei Stock Average 19 3.3 TOPIX 21 3.4 Japanese indices comparison 24 3.5 The joint index JPX-Nikkei Index 400 28 Chapter 4 Index investing 30 4.1 Index investing – active vs. passive 30 4.2 Factors contributing to the growth of indexing 31 4.3 Index investment opportunities 32 4.3.1 Index funds 33 4.3.2 Index certificates 35 4.3.3 Index products 36 4.3.3.1 Exchange-traded funds 36 4.3.3.2 Index derivatives 37 4.3.3.3 Choosing among index products 39 4.4 Nikkei 225 and TOPIX investing 40 4.5 Index investing comparison 42 Conclusion 45 References 46 List of graphs 49 List of tables 49 List of pictures 49 List of annexes 50 Introduction Being a significant, powerful equity market in the world, Japan has always deserved attention from local and international investors. As following the evolution of each security is a long and intricate process, there are stock indices that help investors understand the economic situation of Japan. There are two major indices that are calculated in this country – Nikkei 225 and TOPIX, both of them being followed on international scale. The main goal of this thesis is to focus on the analysis of the Japanese stock indices evaluating their method of construction and providing recommendation on index investing. As these two indices are constantly competing for superiority, I have decided to research this aspect and to present arguments why a certain index is better than the other and in which cases. Besides studying their method of construction, I have also compared several financial instruments having those indices as underlying. The first chapter is dedicated to the overall characteristics of a stock index, mentioning its definition and brief history, its fundamental uses and the factors that make it relevant. The second chapter is focusing on index construction, high lightening the key criteria for an effective index, possible methods of weighting a stock, some essential guidelines for building an index, the techniques of adjusting it due to changes on the stock market and the concept of Free-Float Weight. The third chapter represents the core of the practical part of this thesis. It begins by briefly introducing the indices calculated on Japanese stock market in Japan and overseas. It follows with the detailed analysis of Nikkei 225 and TOPIX index construction according to general criteria like structure, constituents’ changes, calculation method, evolution, etc. In the next subchapter a complex comparison of these two indices will be developed, regarding their performance, usage, composition, sector weight, calculation and adjustment methodology. Lastly, I have included information about a new joint index calculated in Japan, which represents a very interesting combination of different features of those two indices. The last chapter concentrates on index investing possibilities and provides examples of ways to invest in Nikkei 225 and TOPIX. A description of index investing strategy, the factors that have contributed to the growth of indexing worldwide, an array of index investing opportunities and finally, a practical comparison between index certificates and ETFs on these two indices will get us closer to the main aim. In order to fulfill it, I have used the following methods: analysis, synthesis and comparison. 8 Chapter 1 General index characteristics 1.1 Definition and short history The very used on the financial markets term of index can be defined as following: “an agregate indicator, which informs about the overall evolution and situation on the market (market index) or in a certain sector (sector index)“.1 Grace to the fact that an index concentrates in one number the evolution of a certain range of securities it serves as an indicator of the whole market. The idea of creating an indicator that would inform about the market situation was born in the United States in the nineteenth century. In 1884, Charles Dow, the founder of Wall Street Journal, together with Edward Davis Jones have published for the first time the Dow Jones Average Index. This index included 11 companies operating in the railroad sector which were given weight in the index according to their share price. Their main aim was to provide investors through an indicator a general overview of the market situation. A few years later, in 1896, Dow Jones decided to separate the railroad stocks in a special index (Transportation Index) and to create a new industrial average index based on 12 stocks. The publication of Dow Jones Industrial Average began on May 26, 1986. Nowadays, it comprises 30 stocks and remains one of the few price weighted indices.2 A revolutionary year in index history was 1923, when for the first time Standard Security Corporation (now Standard & Poor’s) has created the first index based on market capitalization weighting. Even if at the beginning it included only 90 securities, it expanded over years reaching a value of 500 securities in 1957. Grace to its complexity, it was regarded as the index that best represents the U.S. equity market. That is why both the first retail index fund created in 1976 by Vanguard and the first exchange-traded fund established in 1993 by State Street Global Investors have selected it as their benchmark.3 Since then, the world of indices has considerably evolved. New techniques for index calculation and adjustment appeared, and what is more important, a vast range of index-based products have seen the light. There are several types of indices if we speak about the securities incorporated in it, so that we have stock indices, bond indices, commodity indices, etc. However, the most frequently used and important are stock indices, on which I am going to focus my attention in this thesis. 1 VESELA, Jitka. Investování na kapitálových trzích. Prague: ASPI, 2007. 704 p. ISBN 978-80-7357-297-6, p. 75. 2 SCHOENFELD A., Steven. Active Index investing, maximizing portfolio performance and minimizing risk through global index strategies. Hoboken, New Jersey: John Wiley and Sons, Inc., 2004. 688 p. ISBN 0-471-25707-9, p. 14. 3 FERRI A., Richard. The power of passive investing: more wealth with less work.