Warren Buffett’s Japanese bet is a “clear arbitrage” that reduces currency risks

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Warren Buffett is known to have a penchant for low valuation, high yield investments. In the past, the Sage of Omaha has invested in rail stocks, for example, when they were valued inexpensively. Buffett’s investment strategy in Japan lately has been to borrow locally at low prices and invest those funds in equity assets with a high dividend yield.

First, Berkshire Hathaway issued around $ 4 billion worth of yen-denominated bonds in September 2019, leading some to speculate as Buffet spotted a buyout opportunity. The company later added to that by issuing bonds worth $ 2 billion earlier this year. In total, it has 625.5 billion yen-denominated bonds in circulation.

He has invested an almost equal amount in five Japanese trading houses, known as sogo shosha, making him a major shareholder of Mitsubishi Corporation, Mitsui & Co, Itochu Corp, Sumitomo Corp and Marubeni Corp.

Analysts say the Big Five general trading companies are decades old companies that offer substantially inexpensive valuations. At the same time, last year’s borrowings were at coupons ranging from 0.17% to 1.1%, according to Bloomberg.

“Warren Buffett gets a clear trade-off and he doesn’t run any currency risk. He bought five business houses in Japan with a dividend yield of over 2-4%. 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 back the money anytime soon, ”emphasizes Rajeev Thakkar, director of PPFAS.

Borrowing in Japanese yen is a relatively new strategy for Buffett.

With borrowing rates dropping dramatically during the pandemic, it’s clear Buffett thinks rates are now extremely low.

“Assuming he gets a spread of around 3-4%, these stocks might have to drop more than 50% for him to lose money on these 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 earnings growth, it increases returns, ”Thakkar said.

Berkshire Hathaway owns a large chunk of its money and liquidity, over $ 150 billion, all in dollars. Converting it to yen to buy Japanese assets would expose the company to currency risk which could impact Japanese investment returns.

Buffett is known to have invested in companies for decades, which is somewhat reflected in the length of the loan which can be up to 40 years, although it also includes debt maturing in 3-5 years. years.

However, this is 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 complete these cross-border transactions.

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