Goldman: Japan AI stocks offer hedge fund buying window

Goldman Sachs says the recent sell-off in Japan’s AI-related equities has created an attractive entry point for hedge funds, while cautioning that further pullbacks and higher volatility are possible. The bank says a stronger-than-expected earnings season could revive investor interest in the country’s semiconductor and AI-linked companies.

Bruce Kirk, Goldman Sachs Japan’s chief equity strategist, wrote that “the sharp correction has reset expectations for many AI-linked companies,” increasing the chance that positive earnings surprises could push share prices higher. He added that, provided geopolitical tensions do not deteriorate significantly, current valuations make selected AI beneficiaries worth building positions in, and he continued to view AI’s prospects as intact.

The sell-off followed a global retreat from AI-related investments that affected semiconductor stocks across Japan, South Korea and Taiwan. Investors have grown cautious over high valuations, the sustainability of AI-driven capital spending, rising corporate leverage and intensifying competition from Chinese technology firms.

Japan’s Nikkei 225 has fallen about 14% from its June peak after rising roughly 44% earlier in the year. Several leading AI-focused stocks suffered large losses: Kioxia Holdings and Furukawa Electric each lost more than 40% of market value during the pullback. Some fund managers are monitoring the market for signs of stabilization while others have been adding positions as prices declined.

Goldman expects investor attention to turn back to company fundamentals as the Japanese earnings season starts. Major semiconductor and chip-equipment makers, including Advantest, Tokyo Electron and Kioxia, are scheduled to report results in the coming days. Goldman forecasts first-quarter net profits for companies in the broader Topix index with February or March fiscal year-ends, excluding SoftBank Group, to rise about 26% year-on-year, with AI-related businesses contributing a sizable share of that increase.

Goldman’s prime brokerage data show both gross and net hedge fund exposure to Japanese equities remain above the 98th percentile of their five-year ranges. The bank notes that such concentrated positioning could increase the risk of sharp moves if earnings disappoint or geopolitical risks intensify.

Goldman says strong corporate results could prompt renewed investor engagement with Japan’s AI investment theme after the correction, while warning that concentrated hedge fund positioning and external risks could lead to further volatility before any sustained recovery.