A small presentation

1. NIKKEI STOCK AVERAGE
Prepared By:
Mohit Punjani
Nalini Jain
Nikita Suri
Nitin Bhalla
Nishit Mamgain
Prayag Taneja

2. 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

3. 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

4. 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

5. Economic Bubble

6. Chart

7. Post 1989
Nearly 2 lost decades

8. 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.

9. 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

10. 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

11. 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

12. Sector Balance
36 sectors now consolidated in 6 broad categories
Broad 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 Railroads & Buses, Trucking, Shipping, Airlines,
Utilities Warehousing, Electric Power, Gas.

13. Top Components
Market Cap.
Market Cap Leaders
(Yen)
Current Volume Leaders Volume
1.Toyota Motor Corp. 8,320,018
1.Mizuho Financial Group, Inc. 94,747,300
2.NTT Docomo, Inc. 5,857,830
2.Hitachi, Ltd. 62,117,000
3.Nippon Telegraph And
3.Mitsubishi UFJ Financial 5,014,918
43,885,300 Telephone Corp.
Group, Inc.
4.Mitsubishi UFJ Financial
4.Nippon Yusen K.K 31,940,000 4,579,363
Group, Inc.
5.Toshiba Corp. 30,726,000 5.Canon Inc. 4,441,432

14. Criteria for changes in components
• Significant decline in liquidity
• Delisting
• Changes in industrial structure
• Changes in market environment

15. 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

16. 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

17. 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 900 450
Average Stock Price = 1800/3 = 600
Now, Average Stock Price = 1350/2.25 = 600
So the devisor changes to 2.75
New divisor = ∑Post Stock split Average
_____________________ X Old Divisor
∑ Pre Stock Split Average

18. Calculation of divisor
• Change in Constituents - Merger
Stock Stock Price ¥ Stock Price ¥
A 400 -
B 500 500
C 900 900
D - 1000
Average Stock Price = 1800/3 = 600
So the devisor changes to 4
Now, Average Stock Price = 2400/4 = 600
New divisor = ∑Post Stock split Average
_____________________ X Old Divisor
∑ Pre Stock Split Average

19. 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

20. Criticism
Stock markets are weak even though economy is strong

21. 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.

22. 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

23. Effect of Global Economy on Nikkei
Yen
• Yen strongest in 15 years
• Pressure on exporters
• Negative impact on stock market

24. 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

25. 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

26. 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

27. 1984-1995

28. 2000

29. 2008

30. 2009

31. 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