Bernstein: After software stocks outperform, Japanese AI hardware valuations retreat, creating a new window for investment

According to Zhihu Finance APP, Bernstein has given a positive assessment of Japan's IT hardware and electronics sector: it points out that the fundamentals remain strong, and that market sentiment towards AI is overly pessimistic. Over the past quarter, software and IT service stocks have risen by around 30%, while AI-related stocks have come under valuation pressure due to excessive expectations. However, FY26 earnings projections have been overall revised up by 2% to 11%, making the valuation pullback a buying opportunity.

Bernstein states that Hitachi and Mitsubishi Heavy Industries are long-term top picks, and Murata is currently the best entry point. The firm gives an “outperform” rating to Murata, Hitachi, NEC, Mitsubishi Electric, and Mitsubishi Heavy Industries.

The firm is optimistic about software and cybersecurity, AI components, and the energy and defense industries as three main investment themes, with different weightings for long-term allocation and current timing.

Three Main Investment Themes

Theme 1: Software and Cybersecurity. Domestic software investment growth in Japan is expected to rise from +7.5% in 2025 to +10.3% in 2026. Investor days at Fujitsu and Nomura Research Institute confirm strong demand for IT modernization, data, and AI; Japanese companies are frequently subject to cyberattacks, which is increasing the urgency of cybersecurity orders. The sector as a whole is benefiting from accelerating local demand.

Theme 2: AI Components (MLCC). MLCCs (multilayer ceramic capacitors) are in short supply, with an order-to-shipment ratio sustaining at 1.5. Japanese MLCC exports in July and August rose by 30% year-on-year, pointing to high revenue growth this quarter. Yageo, Samsung Electro-Mechanics, and Taiyo Yuden have already raised prices by 10% to 20%, making price hikes a key sector catalyst. BBU (battery backup unit) and CBU (capacitor backup unit) are driving structural incremental growth, but the influx of new players is intensifying competition.

Theme 3: Energy, Defense, and the Yen. The grid business is expected to grow by 25% to 30% year-on-year. Global annual demand for gas turbines is projected to rise from 91 GW in 2025 to 100–120 GW, with orders likely to exceed expectations. Defense industry revenues are expected to maintain approximately 20% growth. This quarter, the USD/JPY exchange rate fell from 145 to 159, benefiting export-focused sectors overall.