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However shortlived it turns out to be, the Halo trade is doing some heavy lifting in these confused and confusing times. Snappy acronyms can give the impression of coherence, even when it’s in short supply.
For now at least, the investment quest for companies with heavy-asset, low-obsolescence (Halo) credentials is on. The AI revolution is moving more rapidly than was recently assumed, and the business of weatherproofing portfolios at such a pace, and with the storm still very much overhead, is acutely challenging.
It might be less so, however, if Japan is given a chance to prove itself as the ultimate Halo play. It’s a market unexpectedly canonised by the current turmoil: much that once struck investors as ungodly — from the sustenance of zombie companies to resisting outsourcing — suddenly looks redeemed.
A good dollop of faith is required. The picks-and-shovels chase seeks dependable winners. The attack on software and services has punished the most likely losers. The case for Halo, as distinct from either of these, makes investment heroes of non-losers: companies with supposed resilience to the crashing waves of AI-induced disruption. The superficial version of this is old-fashioned US defensives — supermarkets, foodmakers, fast-food chains and the like.
But if the Halo trade gets smarter, it will hunt in less fully priced corners of the global market. Asset-heavy companies pervade the Japanese stock market. That’s the major reason it has spent so much of the past few decades unloved as asset-light dogma dominated. And a great many of Japan’s asset-heavy companies are also engaged in low-obsolescence businesses: niche stuff, where they own unique equipment, are deeply entrenched or have dominated areas too finicky or historically low yielding for Chinese and South Koreans to bother competing.
The Japanese stock market, notes the strategist Pelham Smithers, is rammed with companies that score poorly on standard investor return metrics but suddenly look attractive “due to the weird effect AI is having on both the economics of manufacturing and the destruction of moats in services”.
It is far too soon for gloating, but you can feel a few preparing to do so. Japan’s Halo status was achieved in the face of fierce and sustained criticism — which may, of course, be revived when another snappy acronym emerges.
The long years that followed the collapse of Japan’s 1980s bubble were notable for low (eventually negative) interest rates. Banks rolled over the debts of Japan’s smokestack industries. Mainstream investment wisdom screamed they were crazy to prolong the life of companies that a wealthy, high-cost country like Japan should not logically support.
Japanese companies were supported too in what has generally been seen as a foolhardy, wasteful breadth of industrial coverage. According to calculations by Shrikant Kale, a quant strategist at Jefferies, the average Japanese company is exposed to 2.3 sectors, versus 1.5 for US and European peers. Only a third of Japanese companies are pure plays, against two-thirds in the US and Europe.
But this apparent craziness maintained what is now a hotly desirable set of industrial skills across the industrial spectrum. The ongoing US push for re-industrialisation arises from precisely the void that Japan was once deemed silly for refusing to let form.
Goldman Sachs, among others, makes the case that Japanese companies are positioned to become compelling partners for American industry. American industry, meanwhile, is currently scrambling to more closely resemble what Japan already is. It is significant that the largest investment project so far under the US-Japan tariff deal is a colossal gas turbine facility in the US — conceived to support the energy demands of AI, but almost certainly dependent on Japanese machinery and knowhow.
The pricing power now in the hands of the semiconductor industry, notes Smithers, has granted it to Japanese speciality materials makers like Mitsui Kinzoku, Nittobo and Dowa. These make products that few if any other firms can replicate to the specs required by state of the art manufacturing processes, such as AI chips. “Markets that were worth millions are starting to be worth billions, and margins, which might perhaps have been 10 per cent are set to be above 25 per cent,” he says. Supply chain bottlenecks that are not yet obvious, he adds, soon will be and are often controlled by Japanese Halos.
There is plenty of risk here. The Halo trade could evaporate, taking with it this endorsement of what Japan has spent years defending. For now, it should wear its Halo with pride, but not get sanctimonious.
leo.lewis@ft.com
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