The ultimate winner of Halo trading is Japan?

Against the backdrop of the accelerating AI revolution, investment strategies seeking heavy-asset, low-elimination rate (“Halo”) companies are dominating the market, and the Japanese stock market is poised to become the ultimate winner of this trade.

On February 26, Leo Lewis, head of the FT Tokyo bureau, wrote that the industry disruption brought by AI is prompting investors to swiftly adjust their portfolios to look for “non-losers” with strong risk resistance. Analysis points out that Japanese companies, once neglected by capital due to their heavy-asset models, are now becoming key safe havens for global investors against tech shocks, thanks to their unique industrial heritage and irreplaceable technological barriers.

According to an earlier article by Wallstreetcn, Morgan Stanley believes that funds are now shifting from light-asset narratives toward “HALO” trades (heavy assets, low elimination), that is, allocating to real capacity and networks (such as electricity, rail), which have high barriers and are difficult to be replaced by technology, to hedge against uncertainties brought by AI.

Notably, Leo Lewis believes this trend is substantially reshaping the market’s pricing logic for Japanese assets. As economies like the US push for reindustrialization and respond to AI’s vast energy and infrastructure demands, Japanese companies, owing to their core position in key materials and high-end manufacturing supply chains, are seeing rapid margin expansion and a comprehensive revaluation.

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

Facing the rapid changes triggered by AI, investments seeking heavy asset, low elimination rate (“Halo”) characteristics are becoming the market focus.

According to Wallstreetcn, a Goldman Sachs report published on February 24 noted that, under higher real rates, geopolitical fragmentation, supply chain restructuring, and an AI capital expenditure boom, the market is undergoing a “scarcity repricing.” Stock market leadership is returning to tangible productive assets, and the market now rewards capacity, networks, infrastructure, and engineering complexity, since these assets are extremely expensive to replicate and not easily eliminated by technological iteration.

Analysis notes that this strategy intends to find companies that can resist the wave of AI disruption. If investors broaden their horizons and seek global assets whose value has not yet fully reflected their potential, the Japanese stock market stands out as particularly attractive.

For a long time, the Japanese stock market, filled with heavy-asset companies, was shunned in the era dominated by light assets. In the low or even negative interest rate era after the 1980s bubble burst, Japanese banks continued to extend debt to traditional manufacturers—a practice of sustaining so-called “zombie companies” that was harshly criticized by mainstream investors.

However, most of these companies engage in niche businesses with low elimination rates, possessing unique equipment and high industry barriers, dominating areas with lower margins or overly complex operations and avoiding direct conflict with other Asian rivals.

Strategist Pelham Smithers pointed out that many companies in Japan’s stock market that showed low returns by traditional measures are now becoming highly attractive, due to AI’s unique impact on manufacturing economics and service sector moats.

Industrial Heritage Emerges: Unexpected Dividends of Full Supply Chain Coverage

Leo Lewis noted that in the past, Japan’s approach of covering multiple industrial fields was often seen as silly and wasteful misallocation of resources.

According to Jefferies quantitative strategist Shrikant Kale’s calculations, Japanese companies average across 2.3 industries, while US and European peers average just 1.5. In the US and Europe, two-thirds of companies are pure single-business firms, while Japan’s ratio is only one-third.

Yet it is precisely this seemingly unreasonable breadth that allowed Japan to retain industrial skills across the entire supply chain, now highly sought after in global markets. The US reindustrialization process is specifically to fill the industrial gaps that Japan refused to abandon. Institutions like Goldman Sachs believe Japanese companies are ready to become highly attractive partners for US industry.

Leo Lewis said the US industrial sector is trying to reconstruct a supply chain structure similar to what Japan already has. A prominent example: under the US-Japan tariff agreement, the current largest investment project is a large gas turbine facility in the US, built to meet AI’s vast energy needs—and its construction and operation are almost certain to rely on Japanese machinery and technical support.

Wallstreetcn article pointed out, neither cross-border oil pipelines nor national power grids can easily be 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 Shifts

Notably, the boom in the semiconductor industry is transmitting unprecedented pricing power upstream in the supply chain. Pelham Smithers says this pricing power has shifted to specialty material manufacturers like Mitsui Kinzoku, Nittobo, Dowa Holdings, among others.

Their products are indispensable components for advanced manufacturing processes like AI chips, and almost no other companies can fully replicate their technical specifications. Their monopoly in the supply chain brings direct financial returns. Pelham Smithers added:

Markets once only millions of dollars are rapidly expanding to the tens of billions, and relevant companies’ profit margins could surge from about 10% to over 25%. As supply chain bottlenecks—still not fully exposed—gradually surface, the market will better appreciate Japanese Halo companies’ control over critical nodes.

However, the Halo trade is not without risks. This strategy essentially relies on the ongoing and stable nature of AI disruption. Should a new market narrative emerge or AI’s development path shift, the Halo trade might quickly lose steam, and Japan’s newly earned “endorsement” would also face revaluation.

Japanese companies should remain clear-headed while enjoying this moment. As Smithers noted, the Halo status in the Japanese stock market was earned through years of tough criticism—which could return at any time.

Risk Warning and DisclaimerThe market carries risk; investment requires caution. This article does not constitute individual investment advice, nor does it consider specific users’ unique investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their own circumstances. Investment based on this article is at your own risk.