Is Japan the ultimate winner of Halo trading?

In the context of the accelerating AI revolution, the investment strategy of seeking heavy asset, low elimination (Halo) companies is dominating the market, and the Japanese stock market is expected to become the ultimate winner of this trade.

On February 26, Leo Lewis, head of the Financial Times' Tokyo bureau, wrote that the industry disruption brought about by AI has prompted investors to quickly adjust their portfolios in search of "non-losers" with risk resistance capabilities. Analysis indicates that Japanese companies, which were once neglected by capital due to their heavy asset models, are now becoming a key safe haven for global investors to withstand technological shocks due to their unique industrial heritage and irreplaceable technological barriers.

According to a previous article by Wall Street Watch, Morgan Stanley believes that funds are currently shifting from light asset narratives to "HALO" trades (heavy assets, low elimination), which involve allocating to entities with high barriers that are difficult to be replaced by technology, such as electricity and railways, to hedge against the 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 vigorously promote re-industrialization and respond to the enormous 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 a comprehensive revaluation.

Pricing Logic Reversal: From "Zombie Companies" to AI Safe Haven

In the face of rapid changes triggered by AI, seeking investments with heavy asset, low elimination (Halo) characteristics has become the market focus.

According to an article by Wall Street Watch, a report released by Goldman Sachs on February 24 pointed out that under the combination of higher real interest rates, geopolitical fragmentation, supply chain restructuring, and the wave of AI capital expenditure, the market is undergoing a "scarcity repricing." The leadership of the stock market is returning to tangible productive assets, and the market is beginning to reward capacity, networks, infrastructure, and engineering complexity, as these assets have extremely high replication costs and are not easily eliminated by technological iterations.

Analysis indicates that this strategy aims to find companies that can withstand the wave of AI disruption. If investors further broaden their horizons to seek global assets whose valuations have not fully reflected their potential, the attractiveness of the Japanese stock market is particularly prominent.

For a long time, the Japanese stock market has been neglected in the era dominated by light assets due to the prevalence of heavy asset companies. In the low or even negative interest rate period following the bubble burst in the 1980s, the Japanese banking sector continued to provide debt extensions to traditional manufacturing, a practice that maintained so-called "zombie companies" and was severely criticized by the mainstream investment community.

However, many of these companies engage in low elimination niche businesses, possess unique equipment, and have extremely high industry barriers, dominating many low-margin or overly complex fields, thus avoiding direct competition with other Asian rivals.

Strategist Pelham Smithers pointed out that many companies in the Japanese stock market, which have historically shown low returns on traditional metrics, are now becoming extremely attractive due to the unique impact of AI on manufacturing economics and service industry moats.

Industrial Heritage Emerges: Unexpected Dividends from Full Industry Chain Layout

Leo Lewis points out in the article that in the past, the practice of Japanese companies widely covering multiple industrial sectors was often seen as a foolish and wasteful misallocation of resources.

According to calculations by Jefferies quantitative strategist Shrikant Kale, Japanese companies are involved in an average of 2.3 industries, while their American and European counterparts are only involved in 1.5. In the U.S. and Europe, two-thirds of companies are purely single-business firms, whereas this ratio is only one-third in Japan.

However, it is precisely this seemingly unreasonable breadth that has preserved Japan's full industry chain industrial skills, which are highly sought after in today's global market. The current reindustrialization process promoted by the U.S. is precisely aimed at filling the industrial gaps that Japan has refused to abandon. Institutions like Goldman Sachs believe that Japanese companies are ready to become highly attractive partners for U.S. industry.

Leo Lewis states that the U.S. industrial sector is striving to reconstruct a structure similar to Japan's existing industrial framework. A notable example is that under the U.S.-Japan tariff agreement, the largest investment project currently is a large gas turbine facility located in the U.S. 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 from Wall Street Insight points out that neither multinational oil pipelines nor national power grids can be easily replaced by code or digital innovation. Morgan Stanley's HALO basket (MSXXHALO) is built on this logic, encompassing seven major structural pillars: materials, utilities, railroads, pipelines, waste management, defense, and signal towers.

Semiconductor Materials: Pricing Power Quietly Shifts

It is noteworthy that the prosperity of the semiconductor industry is transmitting unprecedented pricing power upstream in the supply chain. Pelham Smithers indicates that this pricing power has shifted to Japanese specialty materials manufacturers such as Mitsui Kinzoku, Nittobo, and Dowa.

The products produced by these companies are indispensable components in the most advanced manufacturing processes, such as AI chips, and almost no other companies can fully replicate their technical specifications. The monopolistic position in the supply chain brings direct financial returns. Pelham Smithers adds:

The market, which previously had a scale of only a few million dollars, is rapidly expanding to the tens of billions level, with related companies' profit margins expected to soar from around 10% to over 25%. As the supply chain bottlenecks that have yet to fully manifest gradually become exposed, the market will gain a deeper understanding of the control that Japanese Halo companies have at critical nodes.

However, Halo trades are not without risks. This strategy essentially relies on the premise that AI disruption continues to deepen and that the direction of impact remains stable. Once a new market narrative emerges or the development path of AI takes a turn, Halo trades may quickly retreat, and the "endorsement" gained by the Japanese market will also face re-evaluation. While Japanese companies enjoy this moment, they should perhaps remain clear-headed. As Smithers stated, the Halo status of the Japanese stock market has been hard-won amidst years of severe criticism—and that criticism could return at any time.

Risk Warning and Disclaimer

The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk