Warren Buffett's Losses Amid Japanese Stock Turmoil

• News
• 2024-09-28

Goldman Sachs Group Inc. reported on August 5 that, following weak U.S. employment data and a global stock market plunge triggered by the Bank of Japan's interest rate hike last week, hedge funds focused on the Japanese market faced the largest single-day performance loss in Goldman's history.

As of the close of the Asian market, hedge fund managers focused on the Japanese market saw a 7.6% decline in performance over the past three trading days. Among them, the 3.7% drop on August 5 was the largest single-day performance decline on record for Goldman, erasing the full-year gains of these hedge funds over the past three trading days.

According to the latest second-quarter financial report, "Oracle of Omaha" Warren Buffett cashed out at high levels in the U.S. stock market by significantly reducing his holdings in Apple and other stocks. However, even the "Oracle of Omaha" could not escape the losses brought about by the recent sharp decline in Japanese stocks, just like other hedge funds. Nevertheless, the five major Japanese trading houses in which Buffett has invested remain confident in their profit expectations and share price increases for this year.

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The "Oracle of Omaha" once suffered a loss of $13 billion in three days. On August 3, local time in the United States, Berkshire Hathaway, a company under Buffett, announced its second-quarter financial report, showing that it had reduced its holdings of Apple stocks by more than half, with the book value of its Apple stocks decreasing by 51.69%. At the same time, the company's cash reserves at the end of the second quarter reached a record high of $276.9 billion. It is evident that Buffett successfully escaped the peak before this U.S. stock market "great escape." However, he escaped the U.S. stock market but could not escape the Japanese stock market.

The Asia-Pacific stock market encountered a "Black Monday," and the Nikkei 225 Index recorded the largest single-day drop in history on that day. The five major Japanese trading houses held by Buffett, namely Itochu Corporation, Marubeni Corporation, Mitsubishi Corporation, Mitsui & Co., and Sumitomo Corporation, fell by 15%, 18%, 14%, 20%, and 18% respectively on the 5th, resulting in a cumulative decline of 26.43%, 35.2%, 24.02%, 34.14%, and 29.17% over the past three trading days. The total market value of these stocks fell by approximately 117.67 trillion yen. According to Buffett's 9% stake in the five trading houses, the three-day decline resulted in a loss of approximately 2 trillion yen (about $13.045 billion) for the "Oracle of Omaha" Buffett. However, on the 6th, as the Nikkei Index rebounded by about 10%, the share prices of the five trading houses also generally rebounded, with Marubeni rising by about 15% within the first hour after the opening.

Previously, under the long-term ultra-loose monetary policy of the Bank of Japan, Berkshire Hathaway obtained a large amount of cheap yen through issuing yen bonds since 2019, known as the yen carry trade. As Buffett's former golden partner, Munger once detailed Buffett's knack for investing in Japanese stocks: "Japan's interest rate is 0.5% per year, with a loan term of 10 years, while Japanese overseas enterprises are deeply rooted, owning cheap copper mines, rubber plantations, and other natural resources overseas. So Buffett borrows money in Japan at a 0.5% interest rate and invests in Japanese stocks, which have a 5% dividend, thus generating a large amount of cash flow. There is no need to invest in the real economy, no need to think, no need for anything, just lie down and watch the Nikkei Index rise." Using the 5% dividend and subtracting Buffett's 0.5% yen borrowing cost, in other words, Buffett can earn a 4.5% dividend just by "lying flat" each year. Since the issuance of the first yen bond in 2019, Berkshire Hathaway has been one of the largest overseas issuers of yen bonds, choosing to issue yen bonds 32 times out of the company's past 40 bond issuances. According to incomplete statistics, to date, Berkshire Hathaway has issued yen bonds worth about $10.1 billion.

Based on this, in August 2020, Buffett made his first investment in the five major Japanese trading houses, with a total investment of over $6 billion, holding a 5% stake in each. In April 2023, Buffett visited Japan again after 12 years and announced that his investment holding ratio in the five major Japanese trading houses had increased to 7.4%. At that time, he also revealed that his investment in the five major Japanese trading houses was Berkshire Hathaway's largest investment outside the United States. In the same year, in June, Berkshire Hathaway announced that it had increased its holding ratio to more than 8.5%.

In February of this year, in his letter to shareholders, Buffett revealed that Berkshire Hathaway holds about 9% of the shares in the aforementioned five trading houses. He stated that investing in the five major trading houses is more based on his consistent investment philosophy, which is to invest in companies with low valuations, high dividend yields, and stable growth. These companies have strong cash flow and prudent financial management, capable of maintaining stable returns under different market conditions. At the same time, the company's business is also diversified, covering various fields from trade, manufacturing to financial services. The diversified business model can maintain profitability under different market conditions and reduce investment risks. He also stated that he would continue to hold the shares of the five major trading houses for a long term, planning to hold them for 10 to 20 years.

According to the company's report data on February 24, Berkshire Hathaway's investment in the five major trading houses totaled 1.6 trillion yen, with a holding value of 2.9 trillion yen at the end of 2023. The unrealized U.S. dollar gain at the end of the year was 61%, reaching $8 billion (approximately 57.5 billion yuan).Japan's Five Major Trading Houses Maintain Annual Profit Forecasts Amid Stock Market Turmoil

As Japanese stocks plummet, the country's five major trading houses have successively released their financial reports for the first quarter of the new fiscal year (April to June 2024), with mixed results. However, most have exceeded market expectations and maintained their annual profit forecasts.

Itochu Corporation was the last of the five to announce its performance. The quarterly report released on the 5th showed that the trading house's net profit for the first quarter of the new fiscal year was 206.6 billion yen (approximately $1.4 billion), a 3.1% decrease from the same period last year, below the market consensus of 219.1 billion yen. The company's energy and chemical business saw a 53% drop in net profit, primarily due to energy trading and the gains from last year's reassessment of lithium-ion battery business. Mitsubishi's performance last week revealed a year-on-year increase of 11.5% in net profit for the first quarter of the new fiscal year, reaching 354.3 billion yen, thanks to the sale of its shares in an Australian coking coal mine. Mitsui's net profit increased by 9.2% to 276.1 billion yen, which included gains from the sale of shares in the Patang coal-fired power plant in Indonesia. This result was below the market forecast of 279.7 billion yen. Sumitomo Corporation announced a net profit of 126.3 billion yen for the quarter, a 2.4% decrease from the previous year. Sumitomo's Chief Financial Officer, Reiji Morooka, stated that the company's energy division's profits grew by 66% compared to the previous year and will "continue to lead financial performance from the latest quarter (July-September)." Marubeni's net profit for the first quarter of the new fiscal year was 142.6 billion yen, a 0.9% increase from the previous year. Profits in the financial, leasing, and real estate sectors increased by 161% year-on-year, partly due to the accounting gains from the acquisition of shares in Mizuho Leasing, as the acquired target's asset value exceeded the purchase price.

Although the performance is temporarily无忧, Chiyot Takatori, a strategist at Daiwa Securities, said that the trading houses' stock prices are more susceptible to exchange rate fluctuations compared to broader benchmark indices. The yen against the US dollar only rebounded recently, benefiting these trading houses in the first quarter as they earned revenue from operations outside of Japan. However, since the Bank of Japan's rare "hawkish" statement following the interest rate hike on July 31, the yen has rapidly appreciated, reaching 141.67 against the US dollar on the 5th, and quickly falling to 146.28 on the morning of the 6th.

Nevertheless, the five major trading houses have previously stated that the central bank's move has a limited impact on the company's future earnings, as their annual profit forecasts are based on an exchange rate expectation of 140 to 145 for the current fiscal year. Takatori said that the yen against the US dollar is "approaching the trading houses' expected level, making it increasingly difficult for the five major trading houses to exceed expectations in actual earnings subsequently." In their latest quarterly reports, the five major trading houses also mentioned the uncertainties in their business environment, including exchange rates, commodity prices, and the impact of the US elections. Regarding the recent sharp decline in stock prices, Itochu's Chief Financial Officer, Tsuyoshi Hachimura, said, "Part of the reason may be a correction from the rapid rise over the past six months." However, he emphasized that the company can still achieve stock price increases through growth and shareholder commitment.