Buffett’s Berkshire Hathaway Has A Monstrous Japanese Bet

Buffett’s Berkshire Hathaway Has A Monstrous Japanese Bet
Russell Burns

over 1 year ago4 mins

  • Berkshire Hathaway has increased its shareholdings in the five major Japanese commodity trading companies by $2.3 billion to reach a total of $11 billion. The firms are still trading at relatively cheap valuations, despite their strong share price returns.

  • Low commodity inventories around the world could lead to some upward price movement in 2023, as the risk of supply shortfalls and restocking demand stays sticky.

  • If you want to make like Buffett, you could invest in Japanese trading companies or ETFs that track commodities and energy more widely.

Berkshire Hathaway has increased its shareholdings in the five major Japanese commodity trading companies by $2.3 billion to reach a total of $11 billion. The firms are still trading at relatively cheap valuations, despite their strong share price returns.

Low commodity inventories around the world could lead to some upward price movement in 2023, as the risk of supply shortfalls and restocking demand stays sticky.

If you want to make like Buffett, you could invest in Japanese trading companies or ETFs that track commodities and energy more widely.

Mentioned in story

If you had an investing moodboard, you’d probably have at least four photos of Warren Buffett surrounded by pink hearts. So now that Buffett’s Berkshire Hathaway (BRK/B US) has upped its stakes in the five biggest Japanese commodity-trading companies, let’s flesh out why you may – or may not – want to take the hint.

What has Buffett’s Berkshire Hathaway invested in?

Berkshire announced a 5% stake in each of these five Japanese commodity-trading firms back in August 2020: Itochu Corp (8001 JP), Mitsubishi Corp (8058 JP), Mitsui Corp (8031 JP), Marubeni Corp (8002 JP), and Sumitomo Corp (8053 JP). And as you can see in the chart below, so far they’ve notched stellar returns in yen that range from Itochu’s 97% to Marubeni’s 248%.

Japanese trading company performance. Source: Bloomberg
Japanese trading company performance. Source: Bloomberg

Berkshire announced it had upped its stakes last weekend, adding between one and two percent to each of them. That means Berkshire now holds just over $11 billion in the five firms overall, and that means it can benefit from a bouquet of different commodities. See, Mitsubishi’s heavy on oil and coal, Mitsui on oil and iron ore, and Sumitomo’s big on copper and nickel. Itochu isn’t as focused on commodities as the rest, which means it has a more stable earnings structure – but while it’s performed the worst of the five, it’s still up 97%.

Despite those lust-worthy share price rallies, the firms are still trading on relatively cheap valuations. Japan’s near-zero interest rates have kept their dividend yields stable at around 3.5%, while their price-to-earnings ratios sit at a healthy average of 6x. Most of them also have share buyback programs in place, as their targeted total payout ratios – that’s dividends plus share buybacks – ensure that shareholders see some of the profit. They’re banking a ton of free cash too, and Buffett always likes to see that in his investments. And get this: Berkshire Hathaway issues yen bonds in Japan to finance these purchases, so it removes the risk of currency movements wiping out hard-earned gains. That’s come in handy, since the Japanese yen has fallen 33% against the US dollar since August 2020.

Why has Berkshire topped up its investments?

You can pretty safely assume that Berkshire believes the underlying reasons for its initial investments are still holding strong. That’s mainly the benefits of having a toe in the commodities pool, and the fact that real assets are a good hedge in our current inflationary environment – if they’re going for the right price, that is.

And there’s enough to keep their price hoisted in the future. Commodities have been in ultra-high demand – and relatively short supply – now that industries around the world have shaken off their Covid-induced constraints. We might well see a repeat of that next year, as China moves away from its zero-Covid policy and pushes its factories back into high gear. Just check out the chart below: Goldman Sachs highlighted that inventories of a wide range of commodities are at relatively low levels, and – even regardless of what happens in China – we may see “restocking demand” going forward. That demand could come from a few different places. For oil, it could be the currently depleted Strategic Petroleum Reserve in the US. For gas, there are the eventual European refills that will be needed after the winter. And for grain, India may look to bulk up its lackluster supplies.

Commodity inventories vs. 5-year median. Source: Goldman Sachs
Commodity inventories vs. 5-year median. Source: Goldman Sachs

There’s likely to be rousing demand for newer types of commodities too. We’ve written about strong demand for advanced semiconductors here, and Berkshire just happened to take a stake in Taiwan Semiconductor Manufacturing Company (TSM US) – the world’s biggest advanced chip maker – last month. There’s also heady demand for the raw materials used in batteries, like lithium.

What are the opportunities?

It’s not too late for you to join in: if you have access to Japanese equities via your brokerage account, you could invest in one or all of the Berkshire-backed Japanese trading companies. And if you don’t have access, snapping up some general commodities should do the trick. After all, Berkshire recently announced that roughly a third of the $9 billion it had invested in stocks so far this year was poured into energy companies Occidental Petroleum and Chevron Corp. You can take that as a clear sign of Berkshire’s trust in energy and commodity companies in general.

If you’re going for commodities in general, Stéphane summarized why they’re still a solid investment back in September. He recommended the abrdn Bloomberg All Commodity Strategy K-1 Free ETF (ticker: BCI, expense ratio: 0.25%): it’s the cheapest liquid ETF, and it’s well diversified too. The L&G All Commodities UCITS ETF (BCOG) is also a good bet for retail investors: it tracks the Bloomberg Commodity Index and provides you with a diversified batch of energy, precious metals, industrial metals, livestock, grains, and soft commodities. If you fancy more oil and energy, you could consider either the iShares U.S Oil and Gas Exploration ETF (ticker: IEO, expense ratio: 0.39%) or the iShares Global Energy ETF (ticker: IXC, expense ratio 0.40%).

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