BlueBay identifies short-term risk in Japan’s AI stocks before a rebound.

RBC BlueBay’s View on Japan’s AI Stocks

RBC BlueBay Asset Management is optimistic about Japan’s AI stocks, anticipating that gains will continue into 2027, even as potential near-term economic challenges loom in July and August.

Maya Funaki, a portfolio manager based in Hong Kong, noted that a correction in AI stocks may occur in the next couple of months. This could be due to investors adjusting for a peak in spending growth from U.S. hyperscalers, as well as the seasonal rebalancing pressure on Japanese stocks. However, she believes that the sector might rebound next year as investor sentiment improves, particularly with favorable U.S. policy changes coming up before the midterm elections.

“When volatility rises, you need to lower risk, yet AI stocks are on a structural upward trend,” Funaki remarked. She has chosen to maintain her investment in AI while slightly boosting her cash reserves and shifting towards more affordable AI stocks.

BlueBay’s strategy indicates a broader trend in investor sentiment; while there are concerns about the sustainability of stock gains—especially after last week’s drop in semiconductor stocks—many still see the long-term potential for Japan. Strategists view the country as benefiting significantly from the global build-out of AI infrastructure due to its integral role in supply chains.

Funaki oversees approximately 1 trillion yen (around $6.2 billion) in Japanese equities and 700 billion yen in Asian stocks, excluding Japan. Notably, Kioxia Holdings and SoftBank Group are among the primary holdings in the RBC Japan Stock Fund.

While Funaki remains generally positive on AI, he acknowledges that the recent rally has raised concerns about overconcentration in the Nikkei Stock Average. He is underweight in the largest companies within the index and prefers investing in small-cap AI stocks, while also using underperforming value stocks as a protective measure—essentially employing a barbell strategy that mixes high-risk and low-risk investments.

Japan’s diverse exposure to AI, which encompasses everything from cables to multilayer ceramic capacitors, presents “a very encouraging opportunity to capture the upside of the Asian supply chain,” according to Funaki. He believes that compared to neighboring markets like Taiwan and South Korea, Japan’s stock market offers greater depth and liquidity, making it more accessible for foreign investors.