Buffett’s investment in Japan is a bet on inflation and volatility


Warren Buffett buys companies with strong business models that are not fully appreciated. In other words, businesses that look cheap.

Japan’s five big trading houses – Mitsubishi Corp, Mitsui & Co, Sumitomo, Itochu and Marubeni – are doing the trick in terms of valuation at low prices, having been hit hard by the global pandemic and collapsing commodity prices earlier this year. The Sage of Omaha revealed a $ 6.3 billion investment in the quintet and announced he was going to pass it through.

Against the backdrop of Berkshire’s $ 150 billion stack and a global North $ 200 billion equity portfolio led by a large stake in Apple, the foray into Japan is not going to shake up the market. needle, but it sends an interesting message.

At a time when valuations of U.S. tech companies are skyrocketing and their stocks can suddenly soar and banks – another Buffett favorite – are being held back by rising loan losses and lower interest rates. lower down, investors face a more volatile, dislocated and future inflationary situation.

About a fifth of Japanese trading houses’ profits come from cyclical products and resource transactions. In recent years they have turned to private equity and venture capital, so they can also provide Berkshire with a lot of benefits from future deals and investments, accelerated by the consequences of the pandemic. on business.

Commodity prices, led by metals such as copper and gold, have rebounded sharply in recent months, as have long-term bond market inflation expectations. An industrial metals index has recovered by a third from its March nadir and is at its best in 16 months.

The decline of the US dollar – to its May 2018 level against its G10 peers – played a key role in this, while so-called commodity currencies and stocks of global industrial companies rebounded easily. The first few days, but a reflationary trade is brewing.

This is no small step thanks to the efforts of the Federal Reserve. Last week, the US central bank said it would tolerate a higher rate of inflation in the years to come, a policy choice capable of further supporting commodity prices. Having been trapped in a long downtrend over the past decade, a large basket of commodity prices is showing signs of breaking.

In this context, owning commodities trading houses with a global footprint is worth attracting – just like owning a stake in one of the world’s largest gold miners, Barrick Gold, which also recently appeared in Berkshire’s wallet, at the same time Mr. Buffett cut. its holdings in several major American banks.

Granted, banks can benefit from higher market volatility, but trading houses seem to be the better bet since they can benefit from a combination of low borrowing costs and rising commodity prices.

Whether inflation is really coming depends in large part, and it is a very open question among economists and investors. But the combination of easy money and rising public spending absorbed by central banks is showing signs of resonance in financial markets. And despite all the meteoric pull of big tech growth, Apple and its peers look very expensive after stocks far exceeded earnings expectations.

The contrarian approach is to build stakes in companies and sectors that are not valued and likely to benefit from a world of higher inflation and control of interest rates by the central bank.

Critics point to Mr. Buffett’s mixed record in recent years, but the hallmark of a successful long-term investment is recognizing a shift in the narrative and buying well ahead of the herd.

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