Buffett-led share price boom fading

by Jonathan Adams
Berkshire Hathaway

Shares in two of the five commodity-centric Japanese companies traded at or lower levels before Buffett’s Berkshire Hathaway announced its stake

A surge in the prices of shares in Japan’s trading houses — triggered by a $6 billion investment by Warren Buffett — is already fading, due to a lack of fresh catalysts and a downturn in commodity markets.

Shares in two of the five sogo shosha, as the commodity-centric Japanese conglomerates are called, were trading at or lower levels before Buffett’s Berkshire Hathaway Inc. announced its stake purchase.

The August announcement, among the largest investments ever made by Buffett in Japan, not only sparked a rally in stocks, but also boosted overall investor interest in the trading companies.

The failure of share prices to sustain the higher levels despite Buffett’s vote of confidence highlights the challenges faced by the shōsha as the COVID-19 pandemic erodes demand for commodities.

It also speaks to the challenges for a Japanese equity market heavily weighted toward so-called value shares, with the benchmark Topix Index on track to lag the MSCI AC World ex-Japan Index for a fifth straight year in 2020.

Berkshire announced on the last day of August that it had bought stakes of about 5% in each of Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co. and Sumitomo Corp. That sent shares in all five firms jumping, with Sumitomo gaining more than 9% on the day.

As of Tuesday, Itochu and Sumitomo have given up all or most of their gains since the announcement. Only Mitsubishi remains substantially higher — with a 7.8% gain since, versus a 2.6% advance in the Topix index in that period.

The Buffett purchase gave investors a chance to review the shōsha stock prices, but since then they’ve been sold as sentiment wasn’t as strong as hoped for, said Yoshihiro Okumura, a general manager at Chibagin Asset Management. Between sentiment, U.S.-China ties and energy policies, the shares will likely struggle until the U.S. presidential election.

You have to separate the trading houses into winners and losers, said Hiroyasu Nishikawa, an analyst at Iwai Cosmo Securities Co. Among the winners, like Itochu, investors are waiting for fresh news and for earnings, after the company gave very conservative guidance, he said.

Nishikawa also counts Mitsui and Mitsubishi among the winners, while he expects Sumitomo to continue to struggle until the next fiscal year, having taken write-downs and warned of its worst annual loss on record.

That said, a drop in share prices could, if anything, bring Buffett — famed for advising investors to be “greedy when others are fearful” — back to buy more. Berkshire has said that it could raise its stake in any of the five companies up to 9.9%, “depending on price.”

While Buffett’s intentions were unclear, Itochu, Mitsui and Mitsubishi are the prime candidates if Berkshire was to lift its stake in some of the firms, SMBC Nikko analyst Akira Morimoto wrote in a report, citing inflation hedging and securing carry trade spreads as reasons.

This article is for information purposes only.
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