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Markets

Investors are flocking to Mothers, Japan's emerging equity market

Index's 80% surge since March bottom beats Nasdaq and other global rebounds

Ficha, which develops image recognition software based on machine learning, debuted Wednesday on Japan's Mothers index of emerging companies. The Mothers has been on a tear since the middle of March, even outperforming the Nasdaq. (Nikkei montage)

TOKYO -- Japan's Mothers index, an equity benchmark comprised of emerging companies, has gained strong momentum after hitting a bottom in mid-March. Investors are buying on hopes that AI-led digital transformation, cyber security and greater use of the internet of things spurred by the coronavirus will fuel growth for many of the young businesses.

Mothers has skyrocketed over 80% since its March low, nearly double that of the Nasdaq's recovery in the same period. Other major global benchmarks have also rebounded following support by central banks and eases in city lockdowns. However, most indexes remain in negative territory in their year-to-date performance. Mothers, though, has risen 17%, beating Nasdaq's 12% gain.

On Wednesday, three companies debuted on Mothers. The listings were the first initial public offerings in over two months, as the market shake-up from the pandemic deterred many companies from stepping in.

Buy orders piled up for all three of the shares, which made it difficult for opening prices to be set.

In afternoon trading, one of the companies, Locoguide, which operates an online information service on shopping flyers to consumers, opened 2.3 times above its offering price. Opening prices for the other two companies including Ficha -- a developer of image recognition software based on machine learning -- had yet to be determined as demand for their shares continued to exceed supply.

With COVID-19 infections still being reported in Japan, especially in Tokyo, the opening prices of digital transformation-related companies that help people avoid direct contact with others have been strong.

Cyber Security Cloud, which listed on Mothers in late March, is developing a web security service that uses AI technology. Its opening price was more than twice the issuing price, with the share price now having risen to about six times the issuing price.

"Mothers is basically the Japanese version of Nasdaq, where many companies have business models that revolve around technology," said Kazuharu Konishi, general manager of Mitsubishi UFJ Kokusai Asset Management's equity investment division,

"The pandemic has transformed social structures around the world," Konishi said. "The way we live and work is changing. These companies are expected to grow through these business opportunities."

Stocks including biopharmaceutical company AnGes and Fronteo, which uses artificial intelligence in drug discovery research, have both skyrocketed in recent weeks. Their share prices have increased four to five fold since March, with investors hopeful that the companies' businesses will contribute to treating or even curing the coronavirus.

Other businesses and services that cater to new trends such as teleworking and cloud services, as well as e-commerce and internet communication tools, are also catching investor attention as a potential long-term growth area.

"The uncertainty surrounding China-U. S. relations is also another reason investors are shifting their money toward the Mothers market," said Tomoaki Takase, senior fund manager at Sumitomo Mitsui DS Asset Management.

Stocks that make up the index are small-to-medium cap companies, while other benchmarks, such as the Nikkei Stock Average, are mainly comprised of companies in the manufacturing industry that tend to have larger capitalization.

"Companies on the Mothers market are more domestic with a focus on certain business areas, unlike big conglomerates, and therefore are easier to buy right now" Takase said.

The effect of excess global liquidity has also been a driver for the climb in the Mothers, as central banks' expansion of monetary easing policies resulting in lower interest rates have set up a strong backdrop for the market to rise.

Retail investors, meanwhile, have been hopping on the bandwagon by accelerating their asset purchases in the Mothers market.

"I have been looking at companies' earnings reports and am shifting my money toward those on the Mothers market which have not been negatively impacted due to the pandemic," said a 34 year-old resident of Nara Prefecture in western Japan who goes by the social media handle Bell. Along with telemedicine, "I believe that 5G-related business is one major growth area," he added.

The Mothers index is currently trading around 1,050 points, its highest level since October 2018. Some investors believe it is on a path to recover its peak of over 1,300 in January 2018. Some, however, are expressing concerns that momentum is overheating.

"Newcomers to the stock market increased during the pandemic," said Bell, the retail investor. "They have little experience investing and I can tell that market reactions have changed because of them."

Online trading grew during the bear market with the total of new accounts opened at Japan's five major brokerages in March doubling from the previous month as new investors were eager to buy on lows while also hoping to kill boredom while stuck at home as part of social measures aimed at stopping the spread of the coronavirus.

"Stocks with ridiculously high valuations, or those without a clear growth strategy, are being bought too," Bell said.

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