TOKYO -- Warren Buffett has made a surprise investment of over $6 billion in five big Japanese trading houses, a move that could prompt other foreign investors to take another look at the Japanese stock market.
Buffett's Berkshire Hathaway revealed a long-term bet in acquiring a stake of slightly more than 5% in Japan's main trading houses, Itochu, Marubeni, Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp.
Shares of all five companies surged Monday following the announcement and continued to trade at relatively high levels on Tuesday, with Mitsubishi jumping 3% while Mitsui and Sumitomo rose close to 2% each. The other two companies saw their shares rise more than 1%.
Masatoshi Kikuchi, chief equity strategist at Mizuho Securities, said Buffett's investments could give a boost to Japanese stocks more broadly, "as it may trigger global investors to think about diversifying their investments into Japan."
The country has seen foreign investors pull money out in recent years. In 2019, they sold a net of nearly 800 billion yen in Japanese equities, following a net sale of 5.7 trillion yen the previous year.
Berkshire's purchase "may lead foreign investors who rarely invested in Japanese companies to try and increase their holdings," said Richard Kaye, a portfolio manager at Comgest Asset Management in Tokyo. Kaye adds: "It is a big signal that says, 'Japanese stocks are not dangerous and are easier to buy now.'"
Buffett, a renowned stock picker, has stuck to a "value investing" philosophy for decades. He looks for undervalued companies that exhibit solid fundamentals.
"The five major trading companies have many joint ventures throughout the world and are likely to have more of these partnerships," Buffet said in a statement, a sign that he foresees continued growth.
Except for Itochu, the trading houses Buffett has bought into all have market capitalizations below the value of their assets. The price-to-book-value ratios of the four companies range from about 0.7 to 0.86, making them cheap and attractive.
Their shares have also underperformed: Marubeni is 20% down so far this year, while shares in Mitsubishi and Sumitomo have fallen 10% and 13%, respectively. For comparison, Japan's equity benchmark Nikkei Stock Average is down 2%, year to date.
The trading houses' earnings have been hit by the coronavirus pandemic and low resource prices. But most have nevertheless managed to generate stable cash flows. For the current fiscal year, Itochu and Mitsubishi are forecasting a higher dividend payout, while Mitsui plans to maintain last year's dividend level.
Masayuki Kubota, chief strategist at Rakuten Securities, said trading houses are no longer just resource companies but have a wide range of businesses including infrastructure development in emerging markets, like building power plants, railways, and sewage systems. "The companies are also involved in IT, biotechnology, new energy, and even rockets, which are businesses that may not bloom right away but have the potential to become big businesses in the future," Kubota said.
But some market participants question Buffett's decision to invest in the entire sector rather than targeting a single company. "Japanese trading houses are essentially investment companies with very complicated business portfolios. It looks as if Berkshire focused solely on the fact that the stocks were cheap, instead of really analyzing their growth potential," said one investor.
Additional reporting from Takehiro Hasegawa and Satoru Nihei.