You are here: Home » International » News » Economy
Business Standard

Why Buffett's bet on Japan could turn on higher inflation, weakening dollar

Berkshire said late Sunday, on Buffett's 90th birthday, it owned just over 5% of each of Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co Ltd and Sumitomo Corp

Topics
Warren Buffett | Japan

Reuters  |  NEW YORK 

Photo: Shutterstock
Buffett, who at Berkshire’s annual meeting in May professed optimism in the U.S. ability to persevere through the pandemic, has looked outside the country before Photo: Shutterstock

By David Randall and Svea Herbst-Bayliss

NEW YORK (Reuters) - Berkshire Hathaway Inc's $6.2 billion (4.6 billion pounds) foray into Japan's five largest trading houses may signal billionaire Warren Buffett's expectation that and a falling U.S. dollar may make equities more attractive when economies worldwide recover from the coronavirus pandemic. Berkshire said late Sunday, on Buffett's 90th birthday, it owned just over 5% of each of Itochu Corp <8001.T>, Marubeni Corp <8002.T>, Mitsubishi Corp <8058.T>, Mitsui & Co Ltd <8031.T> and Sumitomo Corp <8053.T>, and said it could increase its stakes to 9.9%.

The trading houses, known as sogo shosha with their diversified business lines including commodity exploration, fit the legendary investor's taste for classic value stocks, which have lost investor favor. Berkshire investors said they welcomed Buffett's wager, at a time U.S. stock valuations are at their highest since the late 1990s tech bubble, lifted by giants such as Apple Inc and Amazon.com Inc , both of which Berkshire invests in. "The cocktail is being mixed and Buffett is migrating his investment to where you can create value through inflation," said Bill Smead, chief investment officer at Smead Capital Management, which invests nearly 3% of its assets in Berkshire. "These are companies that will make more money if the price of oil [or] any input goes up." Prices of gold, inflation-linked bonds and some commodities have surged since March on fears that global central banks' more than $9 trillion of stimulus to combat the pandemic will spark higher The Federal Reserve indicated last week it will be slower to move to curtail inflation should it run above its 2% target. At the same time, lower valuations and a continued decline in the U.S. dollar, now near a two-year low, could make and other markets more attractive for U.S. investors, said Jim Paulsen, chief investment strategist at the Leuthold Group. Expectations of dollar weakness bolster the case for U.S. investors to own equities if profits get a boost from the strength of the currencies they are denominated in."That adds up to a pretty good situation for investing in these companies," Paulson said of Berkshire's choices.The move fits with Buffett's longstanding preference for value stocks. "Warren is trying to expand his horizon but stick to his value investing roots at a time the U.S. market is very expensive," said Paul Lountzis, president of Lountzis Asset Management, which invests nearly one-fifth of its assets in Berkshire.

Jamie Rosenwald, co-founder and senior portfolio manager of Asia and investments at Dalton Investments, said Buffett got a bargain "at laughably low valuations on the stock market" which show the "tremendous values available in today."

Buffett, who at Berkshire's annual meeting in May professed optimism in the U.S. ability to persevere through the pandemic, has looked outside the country before, having bought such companies as Israel's IMC International Metalworking and German motorcycle apparel retailer Detlev Louis. "Buffett certainly loves the United States," said James Armstrong, president of Henry H. Armstrong Associates, which invests one-fourth its assets in Berkshire. "Considering that he was able to tap into companies with a global network and their fingers in a lot of pies at an attractive price, that is a winning combination." The bet on the Japanese companies may strengthen Berkshire's toehold in the Chinese market, said Guy Spier, portfolio manager at Aquamarine Capital in Zurich, who said that those businesses "have spent far more time figuring out how to deal with a rising China than many."

Charlie Munger, Berkshire's 96-year-old vice chairman, said in February that Chinese companies are stronger and growing faster than their American counterparts. Berkshire has an investment in BYD Co <1211.HK> <002594.SS>, a Chinese electric car maker.The deal will also help Berkshire trim its $145 billion cash pile.

"Berkshire has the high class problem of needing to put billions of dollars to work," said Dalton's Rosenwald.

 

(Reporting by David Randall and Svea Herbst-Bayliss with additional reporting by Jonathan Stempel; editing by Megan Davies and David Gregorio)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Tue, September 01 2020. 09:04 IST
RECOMMENDED FOR YOU
.