Hedge Fund Says Japanese Stocks Trading at `Remarkable Discount'

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(Bloomberg) -- Japan’s long beaten-down stock market is winning over Dalton Investments.

Belita Ong, chief executive officer of the hedge fund with $3.8 billion under management, said it’s one of her top three global picks. She also favors Indian and Chinese equities, which will benefit from youthful populations, faster economic growth and rising entrepreneurship in the coming decades.

Dalton joins investors from BlackRock Inc. to BNP Paribas Asset Management who are betting on Japan despite its region-leading losses and historic weakness over the past three decades. Bulls argue that the country’s valuations are more attractive than in the U.S. as corporate profits improve. Japanese equities never fully recovered after tumbling in 1989 amid uncontrolled money supply and credit expansion. That preceded further slides during the Asian financial crisis, dot-com bubble and global financial crisis.

“If you went underweight Japan for the past 29 years, you would have done extremely well,” Ong said from Santa Monica, California. “Today, it trades at a remarkable discount."

In Japan, Ong prefers consumer brands and financial conglomerates over technology firms. Dalton is also overweight Indian cement, financial and pharmaceutical companies amid increased consumer demand, while Chinese consumer companies that offer higher quality food and electronics have “enormous room for growth” as a larger share of people enter the middle and upper class, she said.

Here’s what else Ong had to say about her investment outlook:

What opportunities do you see in Latin America?

“There are great companies there but they weren’t screaming cheap in the past. Latin America is now really attractive. Brazil is really tired and has suffered so much from extremist leadership. It’s time for Brazil to heal from corruption and there’s a good chance they’ll find someone in the center. In Mexico, we look at market volatility as an opportunity. It allows us to get in and get out. Companies that are well run will take advantage of the volatility and dislocations within their markets.”

Will South Africa’s new president spur a market rally?

“When transitions take place, there’s often optimism that corruption will be met head on. In South Africa, there are serious problems with the budget deficit, growing debt and structural reforms that are required. At the same time, potential downgrades to corporate debt can truly cripple a company. We’re underweight to the benchmark. It’s just too uncertain. Maybe you should hold off and see how it plays out. One thing you can be sure of is volatility.”

What’s your favorite frontier market?

“We don’t differentiate much between emerging markets and frontier markets, but Argentina is one we like.”

Where else do you find value within emerging markets?

“We also like family-owned businesses, which have outperformed in EM by about 6 percent per year. It’s almost always the case that the people managing the company are highly incentivized to run it well. That’s the behavioral economics. They’ll do better for minority shareholders. Hong Kong-based CK Asset Holdings Ltd is a great example of that -- transforming from a family-owned business into a world leader. Much younger in that evolution are Mexico’s Ternium SA and India’s Piramal Enterprises Ltd.”

©2018 Bloomberg L.P.

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