Is Japan the ultimate winner in Halo trading?

Against the backdrop of the accelerating AI revolution, investment strategies centered on heavy assets and low淘汰率 (Halo) companies are dominating the market, with Japan’s stock market poised to become the ultimate winner in this trend.

On February 26, Leo Lewis, head of the Tokyo bureau of the Financial Times, wrote that industry disruption brought by AI is prompting investors to quickly adjust their portfolios, seeking “non-losers” with resilience. Analysis indicates that Japanese companies, once sidelined due to their heavy asset models, are now becoming key safe havens for global investors to withstand technological shocks thanks to their unique industrial heritage and irreplaceable technological barriers.

According to a previous article on Wallstreetcn, Morgan Stanley believes that current funds are shifting from a light-asset narrative to “HALO” trades (heavy assets, low淘汰率), which involve allocating to tangible capacities and networks (such as power, railways) with high barriers and difficult to replace through technology, to hedge against AI-related uncertainties.

Notably, Leo Lewis believes this trend is fundamentally reshaping market valuation logic for Japanese assets. As the US and other economies push reindustrialization and address the massive energy and infrastructure demands brought by AI, Japanese companies, with their core positions in key materials and high-end manufacturing supply chains, are experiencing significant profit margin expansion and a comprehensive revaluation.

Pricing Logic Reversal: From “Zombie Companies” to AI Safe Havens

In the face of rapid changes driven by AI, market focus is shifting toward investing in heavy-asset, low淘汰率 (Halo) characteristics.

According to a report by Goldman Sachs on February 24, under the combined effects of higher real interest rates, geopolitical fragmentation, supply chain restructuring, and AI capital expenditure waves, the market is undergoing a “re-pricing of scarcity.” Leadership in the stock market is returning to tangible productive assets, which are now rewarded for capacity, networks, infrastructure, and engineering complexity due to their high replication costs and resistance to technological obsolescence.

Analysis suggests that this strategy aims to identify companies capable of resisting AI disruption waves. If investors broaden their horizons to seek global assets whose valuations have not yet fully reflected their potential, Japanese stocks are especially attractive.

For a long time, Japan’s stock market was overlooked during the era dominated by light assets, due to the prevalence of heavy-asset companies. After the bubble burst in the 1980s and during the subsequent low or negative interest rate periods, Japan’s banking sector continued to roll over debt for traditional manufacturing industries—practices that were heavily criticized by mainstream investors as maintaining “zombie companies.”

However, many of these companies operate in niche, low淘汰率 sectors, possess unique equipment, and have high industry barriers, dominating in areas with relatively low profit margins or overly complex operations, thus avoiding direct conflicts with other Asian competitors.

Strategist Pelham Smithers notes that many companies in Japan’s stock market, which historically show low returns on traditional metrics, are now becoming highly attractive due to the unique impact of AI on manufacturing economics and service sector moats.

Industrial Heritage Revealed: Unexpected Benefits of Full Industry Chain Layout

Leo Lewis points out that Japan’s historically broad coverage across multiple industrial sectors was often seen as a foolish and wasteful resource misallocation.

According to Jefferies quantitative strategist Shrikant Kale, Japanese companies average involvement in 2.3 industries, compared to only 1.5 for US and European peers. In the US and Europe, two-thirds of companies are pure single-sector firms, whereas in Japan, only about one-third are.

However, this seemingly irrational breadth has preserved Japan’s full industry chain manufacturing skills, which are now highly sought after globally. The current US push for reindustrialization aims to fill the industrial gaps Japan once refused to abandon. Institutions like Goldman Sachs believe Japanese companies are well-positioned to become highly attractive partners for US industry.

Leo Lewis states that the US industrial sector is actively reconstructing a similar industrial structure to Japan’s. A notable example is a large gas turbine facility in the US, under the US-Japan tariff agreement, designed to meet the enormous energy demands of AI, with construction and operation almost certainly relying on Japanese machinery and technology.

Wallstreetcn reports that neither transnational pipelines nor national grids can be easily replaced by code or digital innovation. Morgan Stanley’s HALO basket (MSXXHALO) is built on this logic, covering seven structural pillars: materials, utilities, railroads, pipelines, waste management, defense, and signal towers.

Semiconductor Materials: Pricing Power Quietly Shifting

It’s noteworthy that the prosperity of the semiconductor industry is quietly transferring pricing power upstream in the supply chain. Pelham Smithers states that this power has shifted to Japanese specialty material manufacturers like Mitsui Kinzoku, Nittobo, and Dowa.

These companies produce products that are essential in advanced manufacturing processes for AI chips, with few other firms able to fully replicate their technical specifications. The monopolistic position in the supply chain is translating into direct financial gains. Smithers adds:

Markets that were once worth only a few million dollars are rapidly expanding into tens of billions, with profit margins expected to soar from around 10% to over 25%. As supply chain bottlenecks, previously unseen, become more apparent, the market will increasingly recognize Japan’s Halo companies’ control at key nodes.

However, Halo trades are not without risks. This strategy fundamentally depends on the continued deepening of AI disruption and a stable direction of impact. If new market narratives emerge or AI development paths shift, Halo trades could quickly fade, and the market’s confidence in Japan’s “backing” may be reevaluated.

While enjoying this moment, Japanese companies should remain vigilant. As Smithers notes, Japan’s Halo status has been hard-won through years of harsh criticism—and such criticism could resurface at any time.

Risk Warning and Disclaimer

Market risks are present; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.