The AI revolution has brought capital-intensive, low-obsolescence 'Halo trades' into the market spotlight. Japanese companies, leveraging their deep industrial heritage, comprehensive industrial chain layout, and monopolistic barriers in core semiconductor materials, have become a 'safe haven' against technological disruptions. They are undergoing a complete revaluation of both valuations and profit margins, positioning themselves as the ultimate winners of this trade.
Against the backdrop of an accelerating AI revolution, investment strategies focusing on capital-intensive, low-obsolescence (Halo) enterprises are dominating the market, with the Japanese stock market poised to become the ultimate winner in this trade.
On February 26, Leo Lewis, head of the Tokyo bureau of the Financial Times, wrote that the industry disruption brought about by AI is prompting investors to swiftly adjust their portfolios in search of 'non-losers' with risk-resistant capabilities. The analysis pointed out that Japanese companies, once shunned by capital for their capital-intensive models, are now becoming a key safe haven for global investors against technological disruptions due to their unique industrial heritage and irreplaceable technical barriers.
According to a previous article by Wall Street News, Morgan Stanley believes that funds are currently shifting from light-asset narratives to 'HALO' trades (capital-intensive, low-obsolescence), which involve allocating high-barrier, hard-to-replace physical capacities and networks (such as power and railways) to hedge against uncertainties brought by AI.
Notably, Leo Lewis believes that this trend is substantially reshaping the market's pricing logic for Japanese assets. As economies like the United States aggressively advance reindustrialization and address the massive energy and infrastructure demands brought by AI, Japanese companies, leveraging their core positions in critical materials and high-end manufacturing supply chains, are experiencing significant margin expansion and comprehensive valuation reassessment.
Reversal of Pricing Logic: From 'Zombie Companies' to AI Safe Havens
Facing the rapid changes triggered by AI, seeking investments with characteristics of being capital-intensive and having low obsolescence (Halo) has become the market focus.
According to an article by Wall Street News, Goldman Sachs noted in a report released on February 24 that amid higher real interest rates, geopolitical fragmentation, supply chain restructuring, and the wave of AI-driven capital expenditure, the market is undergoing a 're-pricing of scarcity.' Leadership in the stock market is returning to tangible productive assets, as markets begin rewarding capacity, networks, infrastructure, and engineering complexity because these assets are extremely costly to replicate and not easily rendered obsolete by technological iteration.
The analysis pointed out that this strategy aims to identify enterprises capable of withstanding the disruptive wave of AI. If investors broaden their horizons further to seek global assets whose valuations have yet to fully reflect their potential, the attractiveness of the Japanese stock market stands out prominently.
For a long time, the Japanese stock market was neglected in an era dominated by light-asset models due to its abundance of capital-intensive companies. During the period of low or even negative interest rates following the bursting of the bubble economy in the 1980s, Japan's banking sector continued to roll over debt for traditional manufacturing industries. This practice of maintaining so-called 'zombie companies' was harshly criticized by mainstream investment circles.
However, most of these companies engage in low-obsolescence niche businesses, possessing unique equipment and extremely high industry barriers. They dominate many low-margin or overly complex fields, avoiding direct competition with other Asian rivals.
Strategist Pelham Smithers pointed out that a large number of companies in the Japanese stock market, which traditionally have low returns based on conventional metrics, are now becoming highly attractive again due to the unique impact AI is having on manufacturing economics and service industry moats.
Industrial Depth Revealed: Unexpected Dividends from Full-Industry Chain Layout
Leo Lewis noted in the article that in the past, Japanese companies' extensive coverage across multiple industrial fields was often seen as a foolish and wasteful misallocation of resources.
According to calculations by Jefferies quantitative strategist Shrikant Kale, Japanese companies on average operate in 2.3 industries, while their counterparts in the US and Europe operate in only 1.5. In the US and Europe, two-thirds of companies are purely single-business entities, whereas in Japan, this proportion is only one-third.
However, it is precisely this seemingly unreasonable breadth that has allowed Japan to retain full-industry chain industrial skills that are highly sought after in today’s global markets. The reindustrialization efforts currently being driven by the US aim precisely to fill the industrial gaps that Japan once refused to abandon. Institutions such as Goldman Sachs believe that Japanese companies are well-positioned to become highly attractive partners for US industry.
Leo Lewis stated that the US industrial sector is striving to reconstruct an industrial structure similar to what Japan currently possesses. A notable example is that under the US-Japan tariff agreement, the largest investment project at present is a large gas turbine facility located in the US. This project aims to meet the enormous energy demands of AI, and its construction and operation will almost inevitably rely on Japanese machinery and technical support.
An article on Wall Street News pointed out that neither cross-border oil pipelines nor national power grids can be easily replaced by code or digital innovation. Morgan Stanley's HALO basket (MSXXHALO) is constructed precisely based on this logic, encompassing seven major structural pillars: materials, utilities, railways, pipelines, waste management, defense, and signal towers.
Semiconductor Materials: The Quiet Shift of Pricing Power
Notably, the boom in the semiconductor industry is transmitting unprecedented pricing power upstream along the supply chain. Pelham Smithers stated that this pricing power has shifted to Japanese specialty material manufacturers such as Mitsui Kinzoku, Nittobo, and Dowa Holdings.
The products manufactured by these companies are indispensable links in the most advanced manufacturing processes, such as those used for AI chips, and there are virtually no other companies that can fully replicate their technical specifications. The monopolistic position in the supply chain brings direct financial rewards. Pelham Smithers added:
A market that was once only worth several million US dollars is rapidly expanding to the multi-billion-dollar level, with profit margins of relevant companies expected to soar from around 10% to over 25%. As yet-to-be-fully-revealed supply chain bottlenecks gradually emerge, the market will gain a deeper appreciation of the control exerted by Japanese Halo companies at critical junctures.
However, the Halo trade is not without risks. This strategy fundamentally hinges on the assumption that AI disruption will continue to deepen and its impact will remain stable. Should a new market narrative arise or the trajectory of AI development take a turn, the Halo trade could quickly recede, prompting a reevaluation of the endorsement Japan's market has gained.
As Japanese companies enjoy this moment, they should perhaps remain vigilant. As Smithers noted, Japan's stock market Halo status was hard-won amid years of harsh criticism—and such criticism may resurface at any time.
Editor/Melody