Warren Buffett is bullish on Japan. The legendary value investor told Japanese media that
Berkshire Hathaway
had increased its stake in several of the country’s trading houses recently, and that he had his eye on other investment opportunities.
Japan’s Nikkei 225 index added more than 1% on Tuesday following Buffett’s remarks, versus a flat-to-down day for other Asian bourses.
There’s a lot for an investor with Buffett’s proclivities to like about Japanese stocks. For starters, they are unloved. Although it has enjoyed a recent winning streak, the Nikkei 225 index is still down meaningfully from its 52-week highs last summer—and nearly 30% below its 1989 record.
The Nikkei 225 trades for around 16 times consensus earnings over the coming year, versus more than 18 times for the S&P 500 and 26 times for the Nasdaq Composite.
“Japan will always be a value market,” says Ashish Chugh, a global equities portfolio manager at Loomis Sayles.
That doesn’t mean there isn’t money to be made, however. Buffett would agree—value investing is his specialty. Compared with the top-heavy S&P 500 or Nasdaq anchored by megacap growth companies like
Apple
(AAPL) and
Microsoft
(MSFT), the Nikkei 225 will certainly trade for a lower multiple by virtue of its composition tilted more toward old-economy businesses.
The Nikkei’s top constituents include Uniqlo-parent
Fast RetailingCo.
(9983. Tokyo), telecom operator
KDDI
(9533. Tokyo), and HVAC giant
Daikin Industries
(6367. Tokyo). Masayoshi Son’s conglomerate
SoftBank Group
(9984. Tokyo) and semiconductor equipment firm
Tokyo Electron
(8035. Tokyo) are large growth-oriented companies in the index.
Berkshire Hathaway’s (BRK. A) recent involvement in Japan has been via several trading houses, namely:
Mitsui
(8031. Tokyo),
Itochu
(8001. Tokyo),
Marubeni
(8002. Tokyo), Sumitomo (8053. Tokyo), and
Mitsubishi
(8058. Tokyo). Buffett bought 5% stakes in all five of them in August 2020 and they have appreciated significantly since.
That growth and additional share purchases since have boosted the value of the combined position to around $13 billion, according to data from Bloomberg. Buffett told Nikkei this week that Berkshire had increased its holdings even more since its latest public disclosure.
As for other investments in Japan, Buffett kept his cards close to his chest. “There are always a few I’m thinking about,” he told Nikkei, without elaborating.
A stronger Japanese yen versus the U.S. dollar and other developed market currencies would provide a tailwind to the country’s assets. The iShares MSCI Japan exchange-traded fund (EWJ) provides broad exposure to the country’s stock market.
Under newly installed governor Kazuo Ueda, the
Bank of Japan
appears ready to tighten monetary policy to an extent not seen in years. That doesn’t mean soaring interest rates, but at least positive ones, and should bring about the eventual abandonment of a bond-buying policy that kept rates low or negative.
It isn’t a recipe for a bull market in Japanese bonds, says David Rolley, portfolio manager and co-head of the global fixed income team at Loomis Sayles. Higher benchmark interest rates would weigh on bond prices, which move inversely to yields—a risk that’s not adequately priced in at present, per Rolley.
Slower economic growth and demographic challenges are the most common macro knocks on investing in Japan. Last year’s gross domestic product was around the same as it was in 2017, 2018, and 2019—and barely above levels first hit in the late 1990s. Japan’s population has been in decline for over a decade and continues to age, reducing the size of the workforce.
Long-term trends aside, there’s more to like in Japan’s economic outlook for the coming year relative to other developed markets—as the country’s later emergence from the Covid-19 pandemic and slower normalization of monetary policy take hold. The result should be a shift from export-driven demand to greater domestic consumption.
“Firstly, the trade deficit has moved from one of the worst in modern times to a narrower one, while the current account has returned to surplus. This has helped strengthen the yen,” wrote Jefferies equity strategist Sean Darby on Tuesday. “Secondly, the deleterious higher cost of living caused by higher energy bills should start to recede, thereby boosting consumer confidence. Thirdly, falling inflation pressures simply due to cost pass-through will take some pressure off the BoJ to raise rates unnecessarily fast.”
He recommends owning Japanese banks, which will benefit in a more normal and positive interest-rate environment. Some of the largest include Mitsubishi UFJ Financial Group (MUFG),
Japan Post BankCo.
(7182. Tokyo), and
Mizuho Financial Group
(MFG).
Darby is also bullish on stocks of Japanese companies exposed to a stronger spending appetite by domestic consumers. Those include many international powerhouses such as
Toyota Motor
(TM) and
Sony Group
(SONY)—as well as Buffett’s five preferred trading houses.
Write to Nicholas Jasinski at [email protected]
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