Warren Buffett’s bet on Japan is a “clear trade-off” that reduces currency risks
Warren Buffett is known to have a penchant for low valuation, high yield investments. In the past, the Sage of Omaha had invested in rail stocks when they were valued inexpensively. Lately, Buffett’s investment strategy in Japan has been to borrow locally at low prices and invest those funds in stocks with high dividend yields.
First, Berkshire Hathaway issued approximately $ 4 billion worth of yen-denominated bonds in September 2019, which prompted some people to speculate as Buffet spotted a takeover opportunity.
The company added to that by issuing bonds worth $ 2 billion earlier this year. In total, it has yen-denominated bonds worth 625.5 billion yen in circulation.
He invested an almost equal amount in five Japanese trading houses, known as sogo shosha, making him one of the largest shareholders of Mitsubishi Corp., Mitsui and Co., Itochu Corp., Sumitomo Corp. and Marubeni Corp.
The Big Five general trading companies have been around for decades and quote substantially cheap valuations, analysts say. At the same time, last year’s borrowings were at coupons ranging from 0.17% to 1.1%, according to Bloomberg.
âWarren Buffett gets clear arbitrage and doesn’t run any currency risk. He bought five trading houses in Japan at a dividend yield of over 2-6%. While the loans are in yen, the exposure is also in yen. The loan is long term. It’s not that they have to pay it back anytime soon, âsaid Rajeev Thakkar, director of investments and director of PPFAS Mutual Fund.
Borrowing in yen is a relatively new strategy for Buffett. As borrowing rates have dropped dramatically during the pandemic, it’s clear that Buffett believes rates are now extremely low.
âAssuming he gets a 3-4% spread, those stocks might have to drop more than 50% for him to lose money on those investments. Buffett will own these companies because valuations are low and yields high. They are strong Japanese companies and if they can unlock value through buyouts or nominal profit growth, it increases returns, âThakkar said.
Berkshire Hathaway has a large chunk of its own money and liquidity, over $ 150 billion, all in dollars. Converting this to yen to buy Japanese assets would expose the company to currency risk, which could impact the returns on the company’s Japanese investments.
Buffett has been known to invest in companies for decades and this is reflected in the term of the loan, which can be up to 40 years, although it also includes debts maturing in 3 to 5 years. Still, it’s not an easy strategy for everyone to emulate. Buffett’s huge balance sheet and Berkshire’s strong liquidity position make it easier for him to close these cross-border transactions than others.
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