Buffett's big Japan bet

Five Things - Asia

China detains an Australian journalist. Warren Buffett's bet on Japan sparks interest in value stocks. And India's economy shrank by an eye-watering 23.9% last quarter. Here are some of the things people in markets are talking about today.

Australian Detained

Chinese authorities have detained an Australian television anchor working with a government-run station as relations worsen between the nations over trade and security concerns. Cheng is a journalist and television anchor working for the Chinese government's English news channel, CGTN, the ABC reported. Cheng has not been charged, according to the Australian national broadcaster, but is being held in detention under a "residential surveillance at a designated location." That can involve being held for up to six months without access to a lawyer or other assistance, the ABC said. While China remains Australia's largest trading partner, relations have markedly deteriorated since the government in Canberra banned Huawei from participating in its 5G network and passed a law to stem foreign interference, prompting several moves including — most recently — a subsidy probe into Australian wine.

Markets Slide

Asian stocks looked set to pull back at the start of a new month after most U.S. stocks retreated, even though technology shares extended gains. Futures pointed to modest losses in Japan, Australia and Hong Kong. The S&P 500 Index edged lower, still notching a fifth consecutive monthly advance in August. The dollar weakened against its Group-of-10 peers, set for a fifth monthly decline in a row. Treasuries advanced, with 10-year yields slipping to just above 0.70%. The Dow Jones Industrial Average led losses after its components were revamped, with Microsoft and Walmart slumping on concern China could block a possible sale of the video app TikTok. Apple's surge as the stock split 4-for-1 lifted the Nasdaq 100 past 12,000 for the first time. Elsewhere, oil fell back below $43 a barrel as a surge in coronavirus in the world's major economies outweighed improvement in China's economic activity. Silver rose, outperforming gold.

Buffeting Value

Warren Buffett's recent $6 billion wager on Japan's trading companies may serve as a catalyst to bring back foreign investors to the country's value-sector heavy stock market, according to some strategists. Berkshire Hathaway's purchase of stakes in five major trading firms that dominate Japan's energy and raw-materials industries — Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo — sent investors into a tizz as they speculated over the U.S. conglomerate's new direction. "Given the highly cyclical nature of the Japanese market, the bets on trading firms seem to underline his bet that perhaps economic cycles are bottoming out and he's looking beyond the pandemic," said Amir Anvarzadeh, a senior strategist at Asymmetric Advisors in Singapore.

GDP Gutted

India's economy posted the biggest contraction among major economies last quarter, with a recent surge in coronavirus infections weighing on the outlook for any recovery. Gross domestic product shrank 23.9% in the three months to June from a year earlier, the Statistics Ministry said in a report Monday. That's the sharpest decline since the nation started publishing quarterly figures in 1996, and was worse than any of the world's biggest economies tracked by Bloomberg. The median estimate in a survey of economists was for an 18% contraction.​ ​While there are early signs that activity began picking up this quarter as lockdown restrictions were eased, the recovery is uncertain as India is quickly becoming the global epicenter for virus infections.

Yield Hunt

It's time to give up on U.S. Treasuries, Jeremy Grantham's GMO says, as a zero-rate world will force investors to consider high-yield corporate bonds and emerging-market debt. Government bonds yielding next to nothing have so lost their appeal that investors have little choice but to look elsewhere, the firm's head of asset allocation, Ben Inker, said in a quarterly letter to investors Monday. Among his suggestions is to consider cutting an equity allocation to 50% from 60% and adding 10% to riskier debt. Low rates — which are likely to be around for years after the recent Federal Reserve policy change — mean that "taking more credit risk in return for higher yield I think makes sense," Inker said in an interview. GMO is known for making bearish market calls, though sometimes so early it has hurt performance. 

What We've Been Reading

This is what's caught our eye over the past 24 hours:

And finally, here's what Cormac's interested in this morning

They'd make an unusual karaoke duo but between the two of them, Warren Buffett and Shinzo Abe have shone a spotlight on Japan that may spark a renewed wave of interest in the country's stock market. Friday's selloff in Japanese equities following news that Prime Minister Abe is to step down had already triggered talk of a buying opportunity with little change to policies expected. Then Buffett's $6 billion bet on five Japanese trading companies was revealed Monday and shares duly recovered. The famed value investor's latest purchases are a commodities, valuation, international and Japan play all in one go, and a smart, defensive wager on a global economic rebound.

Smart because Japanese shares are trading at a steep discount to their recent historical premium against global peers, and almost 40% of the benchmark Topix Index is made up of value sectors most exposed to an uptick in economic growth — industrials, financials and materials. Defensive because unlike the rest of the world, Japan Inc. is sitting on record cash piles and has a whale with unlimited resources — the Bank of Japan — in its corner happily hoovering up the nation's shares. And of course if you are buying yen assets, you get a safe haven thrown in for free. Foreign investors had seemingly soured on the world's third largest economy, offloading a net $43 billion of Japanese shares this year, on course for the biggest annual withdrawal since 2018. Buffet and Abe will make them reconsider.

Cormac Mullen is a Cross-Asset reporter and editor for Bloomberg News in Tokyo.


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