Warren Buffett’s buying of Japanese trading firms helped propel the nation’s stocks to multi-decade highs. Six months on, insurers and banks are emerging as the next potential value targets.
Insurers have low price-to-book ratios, strong fundamentals and relatively high returns, said Masakazu Takeda, who manages the $294 million Hennessy Japan Fund for Sparx Asia Investment Advisors Ltd. in Hong Kong. Major banks are also prospects on the likelihood of tighter monetary policy, said analysts at Mizuho Securities Co. and Mitsubishi UFJ Morgan Stanley Securities Co.
An endorsement from the billionaire goes a long way. The five trading firms that Buffett favored — Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., Marubeni Corp. and Itochu Corp. — are up more than 20% since a report in April said he raised holdings in the sector and was looking to increase exposure to Japanese stocks. Gains were even greater three weeks ago, before the market flirted with a correction amid higher bond yields and a small recovery in the yen.
“Buffett likes businesses that are unsexy, boring yet have solid fundamentals and attractive valuations,” said Sparx’s Takeda, who can envisage the US investor looking at major insurers Tokio Marine Holdings Inc., Sompo Holdings Inc. and MS&AD Insurance Group Holdings Inc. “The thesis for trading companies has probably played out already quite well.”
A spokesperson for Berkshire Hathaway Inc. didn’t immediately respond to requests for comment.
Buffett is known for taking long-term stakes in companies with low valuations, which many Japanese insurers and banks have. Insurers in the Topix have an average price-to-book ratio of 1.1, below 1.5 for the benchmark. Lenders are at 0.7.
Fundamentals also bode well for financial firms amid speculation the Bank of Japan will move toward ending negative rates once it can see stable inflation accompanied by wage gains helping to create a positive cycle in consumption and price growth. Banks and insurers have climbed more than 30% since the start of April, putting them among the best performers on the Topix.
“If wage increases become clearer at the beginning of next year, and if interest rates in Japan are sure to rise, Buffett may buy in early next year,” said Masatoshi Kikuchi, the chief equity strategist at Mizuho Securities. “I think there is still potential for major bank stocks.”
While lenders could catch Buffett’s attention, he may focus on expanding his stakes in trading companies, according to Atsuko Ishitoya, strategist at Daiwa Securities Co. Berkshire plans to increase investments to up to 9.9% of each of the five Japanese firms that he holds, the company said in June.
Mineo Bito, president of Bito Financial Services Co. in Tokyo, agreed that trading firms are likely to remain a major part of Buffett’s portfolio. The strategist, who has attended Berkshire shareholder meetings since 2014, added that Buffett may consider holding companies with stable growth such as Shin-Etsu Chemical Co., Bridgestone Corp. and Fujifilm Holdings Corp.
“Buffett will continue buying Japanese trading companies,” Bito said. “This investment has been one of the best he has made in recent years.”
--With assistance from Kana Nishizawa and Max Reyes.