Spread Betting: Trading the Nikkei 225
Spread betting the Nikkei 225 futures and rolling daily. The Nikkei 225 was first recorded in 1950 and remains one of the most widely quoted Japanese stock indices. As of June 2011, the Tokyo Stock Exchange’s (TSE) listings had an overall valuation of $3.7 trillion, trailing only the London Stock Exchange, NASDAQ OMX and NYSE Euronext platforms at $3.8 trillion, $4.1 trillion and $13.8 trillion respectively. As it is a world marketplace, as you would expect the Nikkei 225 tends to move in the same way as the FTSE 100. The Tokyo Stock Exchange opens at around midnight (UK time) and includes around 2,300 shares including the likes of Nissan, Honda and Toyota as well as Sony and Sanyo.
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The Nikkei-225 index is the most quoted index in the exchange. Here the Nikkei 225 is shown as black candlesticks, and the FTSE 100 is superimposed as a blue line, normalized at the left edge to use the same scale. There are some differences in the direction of movement, but the overall shape is generally the same.
The Nikkei is sometimes referred to as the Nikkei-225 or N-225. It includes 225 companies listed on the Tokyo Stock Exchange, and it is price weighted, which simply means that higher priced stocks have a bigger influence than lower priced ones. Some other indices are capitalization weighted, which means they take into account market capitalization, or the price of shares times the number of shares outstanding, but this is not the way that the Nikkei is formed.
Trading the Nikkei 225 by Alastair McCaig of IG Index
If you are interested in fundamentals and their effect on stock prices, you should know that in September 2009 the Japanese voted their Democratic Party into power. This followed about 50 years of what was called Liberal Democratic rule. This was with a promise to reduce wasteful spending, reduce taxes, and all the other mantras that are so popular with politicians seeking to gain power. Unfortunately, the initial effect was to lose about 20% of the value because the new government failed to show a clear strategy.
The situation changed in December 2009, when the Japanese index started to perform better than its peers, and this appears to be because the Bank of Japan increased liquidity, while the US was starting to signal a reduction in stimulus money. So the recovery appears to have been in comparison with other markets, rather than any further action taken by the Japanese.
For the best part of a decade the Japanese economy has been plagued by deflation but the country’s government has its mind set on reversing that trend. Prime minister Shinz Abe came to power promising a change – to end the years of deflation – and enjoys very high popularity because of this. Equity and bond markets anticipated the liquidity increase and began to rally in mid-November. If the structural reforms are significant and are delivered, many of the old assumptions about Japan will change.
The Bank of Japan’s ‘reflation policy’ has failed to raise CPI above 1% for more than 15 years – with the exception of 2008 when global commodity prices reached a record high. The problem has not been due to a lack of activity from the BoJ. The now all-too-common quantitative easing policy was practically invented by the BoJ in early 2000s and the bank has been pumping money into the economy ever since. The methods taken, which has seen the yen depreciate significantly against the US dollar, have caused the country some short term pain.
Although valuations have fallen significantly over the past few years, we need to see an end to deflation to become more confident on the outlook for asset prices. Government debt is greater than GDP and, in a situation of deflation, debt servicing costs remain higher than long term nominal growth. This is unsustainable in the long run, although the crisis point could be some time in the future.
The potential changes afoot are numerous and wide ranging. These could include material corporate and personal tax reform, a trans-pacific trade agreement, labour market reforms, constitutional change, an overhaul of corporate governance, re-starting nuclear power stations and social change to increase female participation in the work-place. Analysts say that return on equity and profit margins at Japanese corporates could increase towards European/US levels and this could thus sustain the market rally. Specialist Japanese investor Sarah Whitley, who manages the Baillie Gifford Japan Trust, says there is now a uniformity of purpose in Japan to try and solve some of the problems that have been intractable since the notorious Japanese bubble of the late 1980s.
However, Whitley warns that investors should be wary as there remain many challenges ahead and markets are unlikely to continue their uniformly upward ascent. She explains: ‘Much needs to be done to make Japan more internationally competitive in non-manufacturing segments of the economy, as well as to meet the challenges of an ageing society and high levels of government debt. ‘Abenomics’ may not be the complete answer, but it is at least addressing the problems.
Economists though are broadly positive on the policy approach of the Japanese prime minster for four key reasons. The fact he has strong domestic support for his fiscal policy goes a long way in the eyes of many. Since coming to power, support for his financial competence has actually increased which has triggered an acceleration in the rate he is implementing his policies.
With public support behind him, he is predicted to step up public works spending and slash corporate tax rates. The aforementioned Trans-Pacific Partnership would create a free trade association with the United States which would strengthen the link between the two countries’ economic recoveries. Finally, there is evidence that Japanese companies are starting to nudge up salaries for the first time in years – a sign that optimism is already translating to financial gains for the country’s population. Nicholas Weindling, an investor for JP Morgan, says he one of many that believe there are significant opportunities ahead. He explains: ‘We believe that the primary beneficiaries of so-called Abenomics lie in domestic sectors. The improved outlook for export companies thanks to the weaker yen will feed directly through to the domestic economy in the form of higher profits and in turn higher wages.’
Furthermore, the drive for inflation should force companies and individuals out of cash savings and into riskier assets as they become concerned about their purchasing power being eroded.’ Weindling’s portfolio is currently overweight in financial companies. He says: ‘Banks will benefit from increased loan demand as well as being able to sell more investment products. Real
estate companies will benefit as the improved economic outlook pushes down vacancy rates and drives up rents. We also expect housing and condominium sales to improve.
‘Eventually we expect wages to rise as the economy improves which should in turn increase demand for discretionary goods.’ Of course, many believe that economic policy had to change to protect the fabric of corporate and social Japan. Among them is Timothy Tacchi, senior and founding partner at TT International, who says that while the Bank of Japan continues to be overly optimistic in its forecast for an end to deflation, there are some encouraging signs appearing, such as a rise in Louis Vuitton prices, and golf club memberships: ‘On the ground, there’s evidence of a break in that deflationary psychology.’
However, Tacchi warns that if the latest set of policies do not work now then the outlook for Japan is extremely bleak. He says: ‘Debt to GDP is 240% and an aging population suggests a very bleak outcome with high inflation or depression being more likely than not as the outcome.’ ‘Japan, with five trillion in GDP is a giant in Asia and the only country with the GDP or technology to provide some offset to China. It is therefore absolutely crucial to US policy that Japan is standing on its feet.’
One area of interest if you have any Forex experience is the correlation between the Nikkei 225 and the exchange rate for the USD/JPY. If the Japanese yen is weak (which corresponds to a rise in the USD/JPY), then the index rises, and you will find that they closely track each other. This actually happens because the Nikkei 225 is full of companies that are exporters, such as Toyota, Sony, and Canon.
Exporting companies profit the most when the yen is weak and their goods appear cheap to other countries, especially to US dollar spending consumers. The opposite is also true, as when the USD/JPY falls this signifies a strengthening yen which makes export sales fall and the companies profits reduce.
For more insight into the movement of the Nikkei 225, you can also check out correlations that it has to the US bond yields and to the OECD Index of leading indicators.
Spread Betting Example: Trading the Nikkei
Spread betting the Nikkei is recently quite a challenge. Here’s the daily chart of the Nikkei index -:
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You can see that in the last few months the trend has been downwards. It’s generally accepted that Japan trades with short bursts of upside followed by a long declines. Because of this pattern, the Nikkei 225 index is not usually considered a good place for long-term investment, but is rewarding to traders who stay on top of it.
But if you look at the chart above, you can see many gaps between consecutive days, and if you are caught on the wrong side of a trade you have no opportunity to get out at a reasonable stop loss level. There literally is no trading in the gaps between the closing price on one day and the opening price on the next, so the best you could do to mitigate a loss is close your position at the open, if you do not want to pray for the price to return, which is usually not considered a reliable trading technique.
Looking at the longer-term picture, here is the weekly Nikkei chart -:
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The riskiness of this market can be seen from the performance since March 2010, when many pundits were claiming that the Nikkei had started a march to 12,000. You can see that this stalled, and the downward trend is well-established six months later.
Note that the spreads with the Nikkei may be larger than you are used to with the more familiar indices. For instance, with the market shown above you may have a quote from your spread betting provider of 9230 — 9250. This means you can buy or go long at 9250, or you can sell or go short at 9230. You would need the market to move 20 points before you broke even.
On the basis of the current chart, you might want to sell short at 9230, and it’s one of the advantages of spread betting that you can go short just as easily as going long. Looking at the daily chart, there seems to be strong support at 8800, and the daily seems to suggest a weak countertrend move which we don’t see on the weekly chart, which means that we need to watch the chart closely to avoid losses.
That said, assume that the index continues to fall in trend, and finds support at 8800. Your spread betting broker may be quoting 8790 — 8810, so to close the position you buy at 8810. This would give you a total point move of 420, which is £420 for every pound that you bet per point.
Incidentally, this demonstrates the importance of checking more than one time scale when doing any sort of trading. Frequently, you will get a different picture when you look at a different timescale in the chart. It’s generally accepted that you start at the longest time scale in order to get an overall picture and see the long-term trends, then you look at shorter timescales to choose your trading entry.
Spread Betting the Nikkei 225
The Nikkei 225 is the major Japanese stock market index, and includes the stock values for a number of household names. It is also referred to as the Japan 225, and that is how it is named at spread betting provider IG Index, where the current quote is 8748.5 – 8756.5.
This means you can bet on the index to rise above 8756.5 by “buying” at that price, or to go below 8748.5 by “selling” a spread bet at that price. Suppose you think that the index is going up, and wager £2 per point at 8756.5. Later in the day, you check your bets and find that the price is now 8796.2 – 8804.2. You decide to close your bet.
Your profit is the final value minus the initial value, multiplied by your stake, which in this case was £2 per point.
The final value was 8796.2, as you take the selling price when closing your up bet, and your starting price was 8756.5. This means you have a point gain of 39.7.
Working out what your profit is, you multiply 39.7 times £2 to get £79.40.
Suppose instead that the markets moved down to say 8732.6 – 8740.6, and you decided that you needed to restrict your losses by closing the bet, you would close it 8732.6.
You can work out your loss in a similar way to the above. The total change in point value was 8732.6 – 8756.5, which is a negative 23.9 points. Your bet amount was £2 per point, so you must multiply this to see what you lost.
In this case, you lost £47.80 before you closed your bet.
You may have noticed that the spread was eight points on the Japan 225, the Nikkei index, on a rolling bet. IG index are also offering a futures type bet on this index at a price of 8757.5 – 8777.5.
This is for the price in three months time, and as you can see the bet is that it will not move very much from the present price. The spread is 20 points, and it is typical that the spread on a futures style bet is larger than that on the rolling bet.
Taking a gloomy view of the Japanese economy, you might consider betting £5 per point that the index will go down below this, and you place your bet at 8757.5.
If the market continues to fall over the next few months, you could wait for a couple of months. Suppose the price quoted then is 8562.3 – 8582.3, and you decide to close your short bet.
You opened your bet at 8757.5, and you will close it at 8582.3. This is a point gain of 175.2 – remember it is a gain to you because you bet that the index would go down. Your profit is 175.2 times the £5 staked, which amounts to £876.
Suppose instead that the market rose after you placed your short bet, and you decided to limit your loss by closing the bet two weeks after you took it out. IG Index quotes you 8821.6 – 8841.6, so you close your short bet at the higher (buying) price of 8841.6. You have lost a total of 84.1 points, which at your chosen stake is £420.50.
How to Spread Bet Nikkei Spreads
The Nikkei 225 is the main index for the Japanese stock market, and can also be called the Japan 225. It is a price weighted average of the top 225 stocks on the Tokyo Stock Exchange (TSE), and provides an alternative to spread betting on the more familiar Western markets. The index has been around for more than 60 years, and was created by a newspaper called Nihon-Keizai-Shimbun which still monitors its progress.
The index includes a number of recognizable names, such as Panasonic, Sony, Sharp, Mitsubishi, Honda, Toyota, and many others, and the health of these companies directly impacts the movement of the Nikkei, which means that you may well know more about trading this index than you realize. There is no particular weighting according to industry, so it reflects the Japanese market as a whole.
While the Nikkei is somewhere between 8000 and 9000 at the moment, historically it has peaked at 38,916 in December 1989 so it is not surprising that the index is considered a volatile instrument. This is a good thing and a bad thing, as it means that there are large profits to be made by spread betting, but you must also be cautious not to lose too much. The index could easily move several hundred points in a day.
There is a competitive index produced by the Tokyo Stock Exchange, called the TOPIX (Tokyo Stock Price Index), but this is based on about 1700 stock prices (all of those listed on the first section of the market), and it is weighted with market capitalization rather than by the average price, as with the Nikkei index. If the Nikkei is the equivalent of the FTSE 100 in the UK, the TOPIX can be considered the equivalent of the FTSE All-Share. The TOPIX is often considered to be a good barometer of the health of Japan’s industrial and economic sectors with technology, automobile and banking stocks dominating the index.
With the international market for Japanese products, there is little doubt that Nikkei spread bettors need to take into account the global economy when figuring their bets. Over the years, Japanese manufacture has usually been highly regarded, but sometimes spurned by nationalistic movements in other countries. Japanese manufacturers have tried to counter this in various ways, including setting up factories in their main markets, even though some of these are merely assembly lines for products produced in Japan.
Having said this, Japan has suffered from weak growth and persistent deflation for much of the last twenty years after a property and stock market bubble brought the country on its knees. The index reached a December 2008 low of 7173 and has since recovered some ground (March 2013) and Yen weakness may continue helping drive the index higher. Successive prime ministers have persisted with fiscal and monetary stimuli to get the economy moving again which has helped the Nikkei 225 recover some ground.
As would be expected, the Nikkei index was heavily impacted by the earthquake off the coast of Japan on March 11, 2011, and dropped more than 1000 points. While it appears that the negative impact of this natural disaster has been absorbed, they is still the possibility of further revelations about the nuclear power plant at Fukushima as this is not yet been finally contained, even though it has disappeared from the news stream.
There are a couple of interesting reasons to consider Nikkei spread betting as an alternative to betting on other indices. Firstly, although it is influenced by global events just as the Western world indices of the FTSE 100 and the Dow, these can have a different impact on the Asian market. The Nikkei 225 still gives a good degree of volatility for those who thrive on risk. And finally, because of its location on the other side of the globe, you have the opportunity to study and benefit from the time differences.
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