Buffett’s Bet Paves Way for Japan as a Global Value Trade

William Arsn

(Bloomberg) — Warren Buffett’s $6 billion wager on Japan’s trading companies may serve as a catalyst to bring back foreign investors to the country’s value-sector heavy stock market, according to some strategists.

Berkshire Hathaway Inc.’s purchase of stakes in five major trading firms that dominate Japan’s energy and raw-materials industries — Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co. and Sumitomo Corp. — shows the U.S. conglomerate is likely looking beyond the pandemic and betting on global growth, said Amir Anvarzadeh, a senior strategist at Asymmetric Advisors in Singapore.

“Given the highly cyclical nature of the Japanese market, the bets on trading firms seem to underline his bet that perhaps economic cycles are bottoming out and he’s looking beyond the pandemic,” said Anvarzadeh. “If value starts to outperform growth, then investors will start focusing on Japan — and that would be a bigger change than what Buffett does.”

Japan looks like a sensible choice for the global value investor, with its shares trading well below their average historical relative valuation to world peers, at least on a forward price-earnings basis. Classic value sectors — industrials, financials and materials — make up about 37{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} of the benchmark Topix Index, according to data compiled by Bloomberg.

Shares of all trading houses jumped Monday, giving a boost to the beleaguered Topix which is down 6{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} this year, versus a 4{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} rise in the MSCI AC World Index. Foreign investors have sold a net $43 billion of Japanese shares so far in 2020, on course for the biggest annual withdrawals since 2018.

Abe’s Exit

The revelation of the Berkshire stakes comes as investors are digesting Friday’s announcement that Prime Minister Shinzo Abe is to step down, which sent the Topix sliding as much as 1.6{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} that day. The departure of the country’s longest-serving premier could put political risk back on the agenda, though most market watchers don’t expect government policies to change much.

Buffett, who turned 90 on Aug. 30, has purchased other commodity-related names recently, such as Barrick Gold Corp., suggesting Berkshire is shifting its portfolio to hedge against future inflation, said Shinichi Ichikawa, a senior fellow at Pictet Asset Management in Tokyo. Japanese trading company names are also good hedging picks, he said.

“While it’s not clear whether this will affect only specific sectors or the Japanese market as a whole, Berkshire’s bet may become a catalyst for foreign investors to take notice and look for other Japanese stocks that act as good hedges against inflation,” Ichikawa said.

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