Where to start
Fidelity International fund manager Zeng Minqian notes that the market is transitioning from a phase driven by investment themes to one focused on companies' ability to deliver earnings. The five key sectors in Japan's AI landscape—infrastructure, data centers, memory, high-end components, and related supply chain investments—remain robust. However, investors now prioritize order growth, pricing power, earnings resilience, and financial guidance. In this environment, companies turning strong demand into sustainable earnings growth and capital returns hold an advantage over those relying solely on popular themes.
Why just 10 ASX 200 shares?
Japan's stock market has performed strongly this year, partly benefiting from optimism around AI-linked investment opportunities. Yet, entering the third quarter, the market began digesting a concentration rally led by a few AI-related sectors in the second quarter, with semiconductors and AI concept stocks experiencing notable pullbacks. Zeng Minqian believes this correction mainly reflects a reassessment of valuations and earnings expectations, rather than a fundamental deterioration in business conditions.
Key sectors maintaining stability
Zeng Minqian points out that Japanese companies continue to play significant roles in the AI value chain, including memory and storage devices, advanced substrates, passive components, power semiconductors, optical components, industrial automation, and precision manufacturing. While some related industries face recent valuation revaluation pressure, the current pullback primarily stems from the market rebalancing after a sharp rally, addressing overconcentrated positions, rather than signaling a reversal in end-demand trends.
Beyond the semiconductor supply chain, Zeng Minqian maintains a positive outlook on investment opportunities in electrical equipment, industrial automation, and power infrastructure. As AI applications expand, the market's focus is shifting from computing power alone to the infrastructure supporting AI development, including power transmission and distribution networks, cooling technologies, and data center equipment. Japanese companies possess deep technological advantages in these areas. Nevertheless, selective positioning and disciplined valuation investing remain crucial.
Financial stocks and broader opportunities
Zeng Minqian also notes that financial stocks are worth attention. The Bank of Japan's gradual normalization of monetary policy should boost banks' net interest margins and reinvestment returns, improving the overall earnings environment. Meanwhile, ongoing corporate governance reforms in Japan encourage companies to enhance capital allocation efficiency, increase dividends, and implement share buyback programs. As the market's leading sectors broaden from AI-related stocks, some financial companies with stable earnings and reasonable valuations have shown relative strength.
Additionally, Zeng Minqian remains bullish on investment opportunities tied to infrastructure, defense spending, and corporate capital expenditure. Global supply chain restructuring, the energy transition, infrastructure modernization, and national security-related investments are driving demand for industrial equipment, engineering services, and advanced manufacturing technology. Japan's labor shortage and need to boost productivity also support ongoing investments in automation equipment, industrial machinery, and related infrastructure.
Outlook and strategy
Looking ahead, after Japan's stock market rally, volatility may persist as earnings reports and investor expectations adjust. However, the overall investment thesis remains unchanged. The current market reflects a rotation of funds, not a broad exit from risk assets. As Japan's market gradually shifts from AI-themed to earnings-driven, the importance of active stock selection will increase. Keeping a focus on companies with undervalued profitability, pricing power, capital allocation discipline, and shareholder return potential, while adhering to strict valuation principles, will be key to capturing opportunities in Japanese equities.
Comments