Take note: review of Buffett’s purchases in Japan
By Matt Wagner, CFA, Partner, Research
Last August, Warren Buffett’s Berkshire Hathaway made a surprising investment in five Japanese general trading companies, known as “sogo shosha. “
For a company the size of Berkshire Hathaway, with nearly $ 900 billion in assets, the $ 6 billion investment was relatively small.
Perhaps because the amount is just a rounding error for Berkshire, the investment has attracted little public attention. There was initial optimism from some – such as a Financial Times article titled “Why Warren Buffett Could Lead Other Fund Managers Into A Neglected Japan” – but that attention has waned.
And the stock flows of international fund managers certainly did not follow Buffett’s lead. Although there has been a recovery in recent weeks, the cumulative 1.4 trillion yen (roughly $ 13 billion) is paltry compared to the nearly 16 trillion yen in investments made in 2013, the last year. significant inflows of foreign investors to Japan.
Cumulative net foreign equity investment (in billions of yen)
Under the radar, these investments have performed spectacularly. The average return on these investments has been almost 38% since they were made public, well above the Japanese benchmark, the Topix and the S&P 500.
Total yield, 8/28 / 20–4 / 30/21
Increase in cases and slow deployment of vaccines
As we noted in a recent article, Japanese stocks have had a strong performance since the end of August. Although this outperformance was largely driven by its leanings towards more economically sensitive sectors such as finance, industrials and consumer discretionary, the government’s strong fiscal and monetary response was also favorable.
Combined fiscal and monetary response as% of GDP
But in recent weeks, the reflection of the Japanese stock market’s optimism for a global economic rebound has met challenges.
The country’s largest cities have once again entered lockdown phases to control the spread of the coronavirus. This was done to prevent rapid spread of the virus during the Golden Week holidays from April 29 to May 5.
Japan Daily New cases of COVID-19
The virus is taking hold as the government has been among the slowest in the world to roll out vaccinations.
Cumulative vaccination doses administered per 100 people
The double whammy of the rise in cases and the slowness of the vaccination campaign have combined to dampen the recent outperformance of Japanese stocks.
Total cumulative returns of the index
If the past year has taught investors anything, it’s that current trends in the number of virus cases may be completely disconnected from stock market performance. For investors worried about low forward yields evaluations In US markets, Japanese valuations continue to show attractive relative discounts.
Index futures price relative to earnings
While valuations tell us little about the outlook for relative performance over the next six to twelve months, they tend to be very important over five to ten year horizons.
And Japan’s recent virus challenges – which we all hope to reverse quickly – have created opportunities for investors. As Warren Buffet says: “Be afraid when others are greedy and greedy when others are afraid.”
While there are a number of point-and-point markets around the world today that seem downright greedy, Japanese stocks have signaled at least a touch of fear.
Originally published by WisdomTree, 5/5/21
Risks related to securities in Japan:
There are risks associated with investing in Japanese securities. The Japanese economy only recently emerged from a prolonged economic downturn. Economic growth is heavily dependent on international trade, government support for the financial services sector and other struggling sectors, and coherent government policy in support of its export market. The slowdown in the economies of major trading partners such as the United States, China and / or Southeast Asian countries, including economic, political or social instability in these countries, could also have a negative impact on the Japanese economy as a whole. Currency fluctuations can also have a negative impact on the Japanese economy and its export market. In addition, the Japanese labor market is adjusting to an aging workforce, a declining population and the demand for increased labor mobility. These demographic shifts and fundamental structural changes in the labor market can negatively impact Japan’s economic competitiveness.
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