Q+A-Which stocks will join, be dropped from Nikkei 225?

Sun Sep 6, 2009 8:05pm EDT

By Elaine Lies

TOKYO, Sept 4 (Reuters) - Japan's Nikkei 225 .N225 share average is set for an annual reshuffle this month and real estate developer Tokyo Tatemono (8804.T: Quote, Profile, Research, Stock Buzz) and Internet shopping site operator DeNA (2432.T: Quote, Profile, Research, Stock Buzz) are seen as top picks to join.

Some 3 trillion yen in index funds tracked the Nikkei 225 as of late July, Daiwa Institute of Research estimates.

Stocks added to the index benefit because managers of index-tracking funds must include them in their portfolios, while shares of companies that are dropped have to be sold.

Index compiler the Nihon Keizai Shimbun, publisher of the Nikkei business daily, will announce any changes later this month, although it has not made the date public. The changes will take effect from the first business day of October.

Stadium and amusement park operator Tokyo Dome Corp (9681.T: Quote, Profile, Research, Stock Buzz) is seen as a likely candidate for removal.

WHAT ARE THE CRITERIA FOR INCLUSION IN INDEX?

The Nikkei does not reveal all its methodology but analysts say the decision is a combination of trade volume in individual shares and maintaining a balance between six broad sectors.

Factors such as how long it will take the market to absorb a change and how long a share has been listed are also considered.

But the top factor is liquidity, based on turnover and price stability over the past five years, said Osamu Shintani, a quantitative analyst with Nomura Securities, in a report.

Stocks are ranked according to turnover and price stability and this is used to assign a liquidity ranking, which runs roughly from 1 to 450, with a 450-ranking for highly illiquid stocks. In principle, stocks below 75 must be included and stocks above 450 automatically removed, analysts say.

HOW MANY SHARES ARE LIKELY TO CHANGE?

The scale of the reshuffle varies from year to year based on whether there have been interim rejigs when companies delist.

This year, since there have been no interim delistings and no companies meet the criteria for mandatory delisting -- a liquidity ranking above 450 -- only one to two companies in the index are expected to be added or deleted.

WHICH ARE THE TOP PICKS TO JOIN?

Tokyo Tatemono comes up as a candidate in reports from Nomura, Daiwa Institute of Research, Mitsubishi UFJ Securities, and Bank of America-Merrill Lynch.

It is a front-runner because it belongs to an under-represented sector, said Junichi Hashimoto, senior quantitative analyst at Daiwa Institute of Research.

In addition, it would take only 1.43 days of trading for the market to absorb the impact its listing.

DeNA Co Ltd could also be a strong candidate because it is from the same sector as Tokyo Dome, seen as a likely choice to be dropped. But analysts also estimate it might take 3.2 days for DeNA to be absorbed, which might count against it.

Other possibilities are condominium builder Haseko Corp (1808.T: Quote, Profile, Research, Stock Buzz) and venture capital firm SBI Holdings Inc (8473.T: Quote, Profile, Research, Stock Buzz).

While SBI Holdings and Haseko both more than meet liquidity criteria for addition, this has been true for several years and neither has been included, Nomura's Shintani said.

WHICH ARE LIKELY TO LEAVE?

Tokyo Dome, which operates the Tokyo Dome stadium and an amusement park, is seen as a leading candidate because it has the highest liquidity rating among shares on the Nikkei 225.

"In general, they tend to take shares off from the highest down, so I think the chance for Tokyo Dome to be removed is high," Hashimoto said.

Others are realtor Heiwa Real Estate (8803.T: Quote, Profile, Research, Stock Buzz), electrical equipment maker Meidensha Corp (6508.T: Quote, Profile, Research, Stock Buzz), or Clarion Co Ltd (6796.T: Quote, Profile, Research, Stock Buzz), which makes audio-visual equipment for cars. (Additional reporting by Koichi Kawaguchi; Editing by Valerie Lee) ((elaine.lies@thomsonreuters.com; +81 3 6441 1807; Reuters Messaging:elaine.lies.reuters.com@reuters.net))