Zozo, Square Enix Surge as Investors Eye Nikkei 225 Candidates

Potential candidates for the Nikkei 225 surged in Tokyo on Thursday as investors took bets on what companies might become the latest to join the blue-chip index.

Trading house Itochu Corp.’s plans to buy out its convenience store chain FamilyMart Co. are set to open up a prized slot on the Nikkei 225. It’s the second slot to open up this year, after Sony Corp. decided to buy out fellow Nikkei 225 member Sony Financial Holdings Inc.

Some of the candidates to replace FamilyMart jumped, with perennial contender for the gauge Kakaku.com Inc. jumping as much as 14%. Convenience store operator Lawson Inc. added 8.5%, while online mall Zozo Inc., a SoftBank Group Corp. affiliate, added 8.7%.

Zozo, Square Enix Surge as Investors Eye Nikkei 225 Candidates

Assuming the FamilyMart offer doesn’t meet regulatory or investor opposition, it is set to run until Aug. 24. Nikkei Inc. may announce the replacement during its periodic rebalancing typically announced in early September.

Liquid Stock

FamilyMart is a member of the “Consumer Goods” sector, which includes not only retail but also fishery, foods, and services. Nikkei typically chooses the most liquid stock in the sector as the replacement, meaning that the candidate doesn’t necessarily have to be a retail chain. Any proposed changes to the Nikkei are confirmed by a committee of academics and market professionals.

SMBC Nikko Securities Inc. analysts including Keiichi Ito wrote in a note that as the consumer goods sector is underrepresented in the gauge, it’s “unlikely that a non-consumer goods name would be chosen as a replacement.” In addition to Zozo and Kakaku.com, they saw casual dining chain Skylark Holdings among the leading candidates. Skylark added 4.3%.

Nintendo Co., which is in the services category, has frequently been cited as a candidate to join the Nikkei 225 since moving its listing to Tokyo from Osaka. However, predictions it would be chosen in Nikkei’s periodic rebalances have consistently come to naught -- perhaps due to its high share price. Like the Dow Jones industrial average, the Nikkei 225 is price-weighted, so a given company’s share price can determine its impact.

While Nintendo has both the liquidity and market representation, SMBC Nikko said “its weighting within the Nikkei 225 would become outsized” if incorporated into the gauge.

Junichi Hashimoto, senior quants analyst at Daiwa Securities Co., wrote that Suntory Beverage & Food Ltd. is a possible candidate, coming from the same sector as FamilyMart. In the periodic review, Nippon Kayaku Co. could be removed from the index and replaced by Yakult Honsha Co., he wrote. He also cited Square Enix Holdings as a candidate, with shares surging 9.3% in Tokyo to a record. Suntory Beverage added 3.9%, while Nippon Kayaku fell as much as 5%.

In the meantime, investors can speculate on which company will replace Sony Financial. That tender offer runs until July 13, and Tokyo bourse operator Japan Exchange Group Inc. recently approved a rule change which could speed up the announcement of its replacement on the Nikkei 225, which is likely to come before the September review.

©2020 Bloomberg L.P.

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