Warren Buffett has raised his stakes in five Japanese trading companies. The American investor announced that he is considering additional investments in these companies. Why has Buffett turned to Japan?
Warren Buffett, chairman of Berkshire Hathaway, announced in an interview with Japanese media that his company has increased its holdings in several Japanese trading houses and is interested in further investment opportunities in the Cherry Blossom country. According to data compiled by Bloomberg, these positions are now worth around $13 billion. Buffett said that he has since increased his holdings further, but his company has so far not officially confirmed any additional purchases and also has no holdings in other large Japanese companies.
Five trading giants
Mitsui, Itochu, Marubeni, Sumitomo and Mitsubishi are the five largest Japanese trading companies, also known as Sogo shosha (which simply means multi-trade) Buffett has more than a 5% stake in each of these companies specialising in international trade and distribution.
Sogo shosha combine the characteristics of trading companies, distributors, manufacturers and business advisers. They have a wide network of contacts and negotiation skills that enable them to prosper effectively in international markets.
These companies trade in energy raw materials, metals, chemical products electronics, textiles, food, machinery, among others. Sogo shosha play an important role in international trade and are crucial to the Japanese economy. It appears that the publication of the Buffet interview, coupled with the scale of Sogo shosha activity, may have contributed to the 1.6% rise in the Nikkei index (JP225).
Source: Tradingview
Why is Buffett investing in Japan?
Investing in Japanese equities may involve risks that relate to: persistent zero economic growth for more than a decade, an ageing population or potential interest rate increases and monetary tightening. The latter factor may now play a particular role, especially in an era of rising global inflation and the weakening of the Japanese yen. In view of the possibility of interest rate rises, capital growth of Japanese companies is also to be expected. However, this could have a positive impact on the country's financial sector (excluding banks) and the strengthening of the Japanese currency, which has depreciated by as much as 16% against the US dollar since the beginning of last year.
The second factor in Buffett's interest in the financial sector of this market, appears to be the valuation of the companies in which he has invested. The basic ratio that determines after how many years an investment could double, i.e. price to earnings (P/E), is, in turn:
- Mitsui: P/E = 6, owned 6.8%.
- Itochu: P/E = 8.13, owned 6.2%.
- Marubeni: P/E = 5.4, owned 6.75%.
- Sumitomo: P/E = 7.7, owned 6.6%.
- Mitsubishi; P/E = 5.5, owned 6.66%.
The values of this index are extremely low compared to the average value for the S&P 500 (US500) and the US Nasdaq (US100) technology company indices of around 22.2 and 24% respectively. Currently, the market average for Japan's Nikkei stock market is 20, which may explain Buffett's interest in this particular sector.
Buffett's statement seems particularly interesting: "We don't think it's impossible that we will partner with them at some point in the future in a specific deal. We would love if any of the five would come to us ever and say, 'We're thinking of doing something very big or we're about to buy something and we would like a partner or whatever.'"
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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