Head of Saxo Strats
Summary: Berkshire Hathaway have recently increased its inflation protection by buying a stake in the world's largest gold miner and buying natural gas pipelines and storage facilities. Over the weekend it announced 5% stakes in five Japanese investment companies which looks like a bet on the commodities sector and the JPY. Warren Buffett wants less of the US and more of the world. Every investor should consider the same action.
Berkshire Hathaway announced over the weekend that it has acquired a stake of more than 5% in five Japanese trading companies, although they are more like conglomerates, which would have cost Berkshire Hathaway around $5-6bn to acquire. The amount fits close to the amount of JPY the company has raised through bonds in September 2019 and March 2020.
The five Japanese companies are Mitsubishi, Mitsui & Co, Sumitomo, ITOCHU and Marubeni. Shares in these companies were up between 4-10% in today’s session. In JPY terms these stocks have not been super compounders except for ITOCHU which is up 113% over the past five years equivalent to 16.3% annualized. Marubeni is the worst performing stock of the group up only 6% over five years.
When you look at the five investment companies, they are not the typical Warren Buffett company. They have distinct brand or strong competitive advantage judging from their low return on invested capital (ROIC) and low operating margin (EBITDA margin). They are all engaged in a wide range of businesses across energy, commodities, power plants, mining, infrastructure, shipping etc. However, these sprawling investment companies come with a low valuation as the average free cash flow yield on these companies is 6.6% which is far above the overall equity market and the current offered interest rate in corporate bonds. The bet on these companies look most of all a currency bet and then a “safe” way to invest in a complex foreign economy like the Japanese where Berkshire Hathaway probably does not feel it has an analytical advantage.
| Name | Ticker | Market cap. (USD, mn.) | ROIC (%) | EBITDA margin (%) | FCF yield (%) |
| Mitsubishi Corp | 8058:xtks | 35,246 | 1.5 | 5.1 | 6.0 |
| Mitsui & Co Ltd | 8031:xtks | 31,031 | 1.8 | 6.3 | 3.4 |
| Sumitomo Corp | 8053:xtks | 16,239 | 1.4 | 5.1 | 5.1 |
| ITOCHU Corp | 8001:xtks | 40,756 | 4.4 | 7.3 | 9.1 |
| Marubeni Corp | 8002:xtks | 10,496 | -2.8 | 0.6 | 9.2 |
Source: Bloomberg and Saxo Group
The main message last week from the Fed announcing their new average inflation targeting is that the Fed would like to see a structurally weaker USD over time driven by higher inflation. Warren Buffett has been warming up for that message over the past year and seems to have put Berkshire Hathaway onto a new trajectory diversifying its assets across more geographies and currencies. Besides these five Japanese investment companies Berkshire Hathaway recent bought a large stake in the world’s largest gold miner Barrick Gold and in July it bought natural gas pipelines and storage facilities from Dominion Energy. All these bets are direct ways to get the portfolio ready for higher inflation and any investor should probably also think about ways to create inflation hedges in their portfolios. The energy, agriculture and gold have typically done well during inflationary periods.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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