OREANDA-NEWS. Nikkei 225 Index Outperforms S&P 500 Index Year-To-Date

In the first two weeks of September, Japanese equities fell 5%, following weak domestic and Chinese economic releases. On 14 September, Monday, the Nikkei 225 Index closed below the key psychological level of 18,000 for the fifth time in under one month.

Despite the recent drop in the Nikkei 225 Index, Japanese equities remain one of the best performing major markets in the world with a 4.7% year-to-date rise as of 11 September. In contrast, the S&P500 Index has recorded a 4.8% fall in the same period.

Term Structure of Nikkei Dividend Futures

The SGX Nikkei Stock Average Dividend Point Index Futures (ND) contract is a futures contract based on the Nikkei Stock Average Dividend Point Index. The underlying index calculates the accumulated dividends that an investor would have been entitled to receive if the investor had held the constituent stocks of the Nikkei Stock Average over a 12-month calendar year.

The ND price is expressed in Nikkei 225 Index terms. For example, if the Nikkei 225 Index was trading at 10,000 and the expected dividend yield was 2%, then the price of the ND futures would be 200 points. The current spot month is December 2015, and the contract trades further one year maturities currently through to December 2022.

The August global market turmoil and knock-on effects of the Chinese stock market’s plunge resulted in flattening of ND the term structure. Compared to three months ago, the ND term structure has changed from a steep upward slope to a more gradual inclined slope at the end of August.

Term Structure of SGX Nikkei Stock Average Dividend Point Index Futures

The price relationship of the Nikkei Dividend Futures for the current spot December 2015 contract, the December 2016 contract and the December 2017 contract have also shifted in the past three months.

Of the three contracts, the largest decrease in expectations was for the December 2017 contract. At the start of June 2015, the dividend yield for the December 2017 was expected to rise by an equivalent of 32 Nikkei 225 Index points. After the frantic selloff during the last week of August, the expected dividend yield for the December 2017 contract fell to the equivalent of 20 Nikkei 225 Index points. 

With the current term structure significantly above the 1-year ago term structure, the dividend expectations at the end of August for the Nikkei 225 Index constituent stocks remain elevated compared to expectations a year ago. As such, the global market uncertainties have not completely altered dividend and earnings expectations.

Increased or decreased expectations of dividend increases by Japanese companies as well as inflationary expectations for longer maturities and purposes can affect the term structure of the ND Futures.

During the August market turmoil, Japanese companies took the opportunity to step up stock buyback plans as the Nikkei 225 Index slid 8%. The share buybacks could help support share price but may leave companies with less fund to raise wages and pay dividends should global growth falters.

Nikkei Options Put-to-Call Ratio Signals Risk-Off

Bearish option positions relative to bullish contracts have grown to the largest levels in more than three years, signifying overall weak market expectations.  The SGX Nikkei 225 Index Options put-to-call ratio rose to 1.4, indicating that anxiety continues and that a market rally may be unlikely in the short-term.

Global risk factors that include possible US Federal Reserve’s interest-rate hike this week and further devaluation of the Chinese yuan continue to weight on expectations.    

Investors Long-Term View Reflective in Recent SGX Nikkei 225 Index Futures Roll

The most recent roll of the SGX Nikkei 225 Index Futures from the September 2015 to the December 2015 contract continued to reflect investors long-term view of the Japan market, with the majority of Sep 2015 contracts re-establishing in the December 2015 contract.  As of the last trading day, 10 September, 60.7% of outstanding positions have rolled into the December 15 contract, versus 1 year historical average of 59.6%.

The pace of roll chart below shows the progression of roll activity out of the expiring contract into the further contract months.