Warren Buffett Goes Sogo Shosha

Japanese stocks outperformed to start the new week as news of Berkshire’s $6 billion stake in five Japanese trading houses bolstered local shares just one business day after the nation’s equity markets were shaken by the resignation of Shinzo Abe.

Shares of Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo, were sharply higher on the session. Berkshire said it intends to hold the positions (described in a press release as “slightly more than 5%”) for the “long term”, and said that while the holdings may increase, they won’t top 9.9% in any of the five investments.

Buffett is pleased with the positions. “I am delighted to have Berkshire Hathaway participate in the future of Japan and the five companies we have chosen for investment”, he remarked. “The five major trading companies have many joint ventures throughout the world and are likely to have more of these partnerships”. Apropos of nothing, Sunday was Warren’s birthday — he is (roughly) 167 years old.

From a signaling perspective, Berkshire’s investment is good news for commodities and Japan.

These are, of course, commodities-centric businesses, which seems to suggest Buffett’s outlook on the global economic recovery can’t be all bad, despite some of the dour-sounding commentary from recent Berkshire filings and his disposal of airlines. Or maybe this is just another play on inflation.

The five companies “supply resource-poor [Japan] with everything from natural gas to noodles, and have spent the last few decades transforming into conglomerates that hold equity stakes in hundreds of companies around the world”, Bloomberg notes, in their coverage, adding that although the companies have “diversified into areas like textiles and machinery, they still derive much of their revenue from energy, metals, and other commodities”.

Over the past several months, commodities have rebounded alongside inflation expectations, thanks in no small part to crude.

Ultra-accommodative monetary policy has bolstered commodity prices, as have expectations for a vaccine, which in turn feeds the global reflation narrative. Obviously, a weaker dollar is a key piece of the puzzle as well.

Japanese equities will certainly take the apparent vote of confidence. Although most expect policy continuity on virtually all fronts following Abe’s resignation, there are still some near-term concerns.

Japan, like the rest of the world, is struggling to prevent new coronavirus flareups and resurrect the economy. Prior to the pandemic, a typhoon and last year’s tax hike led to consecutive quarterly contractions. That gave the virus a kind of “insult to injury” feel, and that’s to say nothing of the delayed Tokyo Olympics.

In addition to the above, this is notable for what it’s not — namely, an investment in the US.

Berkshire’s shares have suffered in 2020, and although Q2 looked better thanks to the rebound in the conglomerate’s massive equity portfolio, Buffett’s cash hoard surged more than $9 billion for the second straight quarter.

Some of the increase was attributable to the sale of airline stocks, but the point is, Buffett has cash to deploy and apparently, Japanese trading houses looked more appealing than, say, US banks and good ol’ American junk food.


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