Japanese equities shift from AI momentum to earnings delivery
Min Zeng
Japanese equities have performed strongly this year, supported in part by enthusiasm around AI-related opportunities. As markets entered the third quarter, however, they began to digest the narrow rally that drove Q2 performance. Semiconductor and AI-related stocks have pulled back notably, but Min Zeng, portfolio manager, Fidelity International, views this primarily as a reassessment of valuations and earnings expectations rather than a meaningful deterioration in corporate fundamentals.
Min Zeng comments: “The key point is that the market appears to be shifting from a theme-led phase to one more focused on earnings delivery. Demand for AI infrastructure, data centres, memory, advanced components and related supply-chain investment remains intact, but investors now require clearer evidence of order growth, pricing power, margin resilience and guidance support. In this environment, companies that can convert strong demand into sustainable earnings and returns on capital should be better placed than those relying mainly on thematic momentum.
“Japanese companies continue to occupy important positions across the AI value chain, including memory and storage, advanced substrates, passive components, power semiconductors, optical components, industrial automation and precision manufacturing. While some of these areas have faced near-term valuation pressure, the pullback appears to reflect a rebalancing of crowded positions after strong prior gains, rather than a reversal in underlying demand trends.
“Beyond the semiconductor supply chain, we remain constructive on selected areas linked to electrical equipment, industrial automation and power infrastructure. As AI adoption expands, investor attention is broadening from computing capacity to the infrastructure needed to support AI deployment, including transmission and distribution networks, cooling technologies and data-centre-related equipment. While Japanese companies possess strong technological advantages across these sectors, selective positioning and a disciplined focus on valuations remain essential.
“Financials are also an important area of opportunity. The Bank of Japan’s gradual policy normalisation should support a more favourable earnings environment for banks through improving net interest margins and reinvestment income. At the same time, corporate governance reform is encouraging better capital allocation, higher dividends and share buybacks. As market leadership broadens beyond AI-related names, selected financial companies with resilient earnings profiles and attractive valuations have shown relative strength.
“We continue to see opportunities in companies linked to infrastructure investment, defence spending and corporate capital expenditure. Supply-chain reconfiguration, energy transition, infrastructure modernisation and national-security investment are creating demand for industrial equipment, engineering and advanced manufacturing technologies. In parallel, labour shortages and the need to improve productivity should support investment in automation, machinery and related infrastructure.
“Looking ahead, Japanese equities are likely to experience further volatility as investors assess earnings results and reset expectations after a strong rally. Nevertheless, the broader investment case remains intact. Current market dynamics suggest rotation rather than a broad withdrawal from risk assets. As Japan moves from an AI-driven market to a more earnings-driven market, active stock selection should become increasingly important.”
