Ben Preston, co-fund manager of the Orbis Global Equity fund, discusses why he finds the Japanese and South Korean markets attractive, and outlines top stock picks.

Ben Preston at Bermuda-based Orbis Investments thinks the Japanese and Korean markets are attractive and has found great value there recently, citing factors such as the rebound in tourism in Japan. 

Japan adopted a strict policy to curb Covid-19 and lifted regulations relatively recently, opening the doors to foreign visitors - and the commercial consequences as a result. "The tourists are now coming back,” he told this news service in an exclusive interview.

"Japan is also becoming really competitive. Wages were flat for many years and the yen is very cheap. Therefore, goods can be produced competitively as it’s one of the few places where wages have come down in real terms, to the benefit of the economy,” he continued. “The tensions between China and the West have also made firms not want to rely on China’s supply chain for goods, which has impacted Japan positively,” Preston said. â€śIn addition, the Japanese government realised that investors were not well served by firms just keeping cash on their balance sheets. Therefore, the Tokyo Stock Exchange told them that they are not doing enough to create shareholder value, and they should do something about it by, for instance, paying dividends. They are now doing that which has been tremendous for investment success.”

Preston is not alone in taking a positive view. DWS, the German investment house, is upbeat about Japan's equity market, for example. SuMiTrust has smiled on the stock market. In recent years, the result of corporate supply-side reforms and fiscal and monetary policy changes have encouraged investors to start moving into Japanese assets again. See this view from Nomura, and recent commentary from this publication's editor.

Undervalued
Preston said there are a lot of attractive stocks out there which are still undervalued. “One example is banks which have tremendous value, due to the changes that have been happening. They are in a very strong position,” he added. “Their balance sheets are in better shape. And if interest rates rise, bank earnings will also be higher, and so will dividends. If nothing changes in Japan, and rates don’t rise and the status quo persists, we will still do ok. But if they do change, as we predict, we expect shares to roughly double. Heads we win and tails we don’t lose.” 

“The improvement in corporate governance has also been a huge factor in Japan,” Preston said. “It can be measured by looking at returns on equities. For many years, Japan was well off pace compared to the US, but it has now caught up dramatically. Returns on investments and profitability have improved as a result. Productivity is also improving. More females are joining the workforce and working more hours which has helped productivity to rise,” he continued.

Preston invests in Sumitomo Mitsui Financial Group, the Japanese mega-bank, which is Japan’s second largest financial group. It is currently trading at a 40 per cent discount to book value, meaning that investors are paying very little for that upside potential. He also invests in Mitsubishi UFJ Financial Group, as well as a number of insurance companies which are cheap for similar reasons. They include Sompo Japan Insurance and MS&AD Insurance Group. "We also own a number of shares in Japanese drugstores that are beginning to recover, including the largest one Tsuruha Holdings, as well as Sugi Pharmacy and Cosmos Pharmaceutical," Preston said.

South Korea
Turning to South Korea, Preston thinks that this country is also undervalued. “It is culturally similar to Japan,” he said. “Firms haven’t focused on the shareholder value and they are still slow so it is operating with low dividend payouts. We have been engaging with banks to say this is not working well. Others are sending the same message and the banks are starting to change and increase their dividends which is good for shareholders. Nevertheless, interest rates have already risen to reflect inflation so banks' earnings are fine. Earnings have come through but still lagging in dividends so stocks are still very cheap,” he said.

Preston invests in KB Financial which is the largest financial holding company in Korea by assets held, with a leading market share in the domestic retail banking sector through its subsidiary, Kookmin Bank. Other Korean banks he invests in are Shinhan Bank, KEB Hana Bank and Woori Bank. He is not alone in his views. Swiss private bank Julius Baer is also optimistic about the outlook for Japan and South Korea, saying that they expect funds to keep flowing into these countries.

Orbis Global Equity fund
Preston is co-manager of the fund which aims to deliver higher long-term returns than global stockmarkets. It has outperformed the benchmark in 2023 and on a three-year basis, with holdings in the US, Japan and the UK. Japan and Korea are two of the biggest overweight positions in Asia. Top 10 holdings include Japanese-based Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group.

The fund mainly invests in banks and other financial institutions, including KB Financial, but it does invest in some tech stocks such as Samsung Electronics and Taiwan Semiconductor Manufacturing Company (TSMC).