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Buffett's Bet: Japan Over China in Uncertain Times
Written by Shernice,if you like my article please hit the like button.
The market's biggest concern right now is uncertainty.
When there’s uncertainty, the willingness to buy diminishes, and the volume of purchases shrinks.
That's why we see Bank of America's strategy being quite conservative, with the sentiment that nothing seems like the right investment.
If you buy stocks, it feels risky, as the market seems greedy.
If you buy bonds, Powell has already indicated a maximum of four rate cuts this year, so there’s little room for price growth.
So, what should investors buy? In this environment of fear, combined with the ongoing conflicts in the Middle East, the market is resorting to hedging strategies.
On 1st Oct, Iran launched hundreds of missiles toward Israel, with several hitting Israeli territory. This marks Iran's second attack on Israel this year, following a missile and drone assault in April. In response, Israel has vowed retaliation after the barrage of ballistic missiles, signaling a dramatic escalation in a conflict that seems to be spiraling out of control.
Some are betting on prolonged interest rate cuts, while others are wagering on a short-term U.S. stock rally or the unpredictability of the Middle East.
As a result, many are turning to gold. While gold has paused its rally recently, it remains one of the top-performing assets this year, having already gained 30%.
The historical pattern shows that gold's final surge occurs when interest rate cuts end, but we're just at the beginning of the cycle.
Despite the significant rise in gold prices, Bank of America's strategist Hartnett believes this is only the initial phase of the gold rally, with the real upward momentum linked to a recession.
Meanwhile, U.S. stocks may face heightened volatility in October. In contrast, Chinese stocks have recently shown strength, driven by stimulus policies.
However, it’s curious why Warren Buffett hasn’t increased his positions in Chinese stocks, instead favouring Japanese investments.
Buffett has been rapidly selling off Apple and Bank of America shares, possibly reducing his holdings to the point where he no longer needs to report to the SEC next quarter.
Buffett's selling of U.S. stocks raises questions about whether this signals a shift toward Asian markets. The international consensus seems to be that U.S. stock valuations are too high, while Chinese stocks are undervalued. Surprisingly, despite this belief, Buffett hasn’t taken any new positions in Chinese stocks but remains focused on Japan. This could be because, historically, whenever Buffett issues yen-denominated bonds, it signals a bottoming in Japan’s five major trading companies, offering a favourable dividend yield and low financing costs, allowing Buffett to profit from the interest rate differential.
As for China, despite its record-low valuations, Buffett has reduced his exposure to A-shares and Hong Kong stocks, including companies like PetroChina and BYD.
This suggests that, for Buffett, China’s market is too unpredictable, making value investing challenging.
While Japanese stocks can be evaluated based on price-to-book ratios, which suggest undervaluation, Chinese stocks often surprise investors by continuing to fall even after seemingly hitting rock bottom and discovered there is still 18th level of hell under the "rock bottom".
This makes value investing in China unreliable, and Buffett’s actions highlight his caution in this regard.
Although there's capital flowing into Chinese stocks, it may be more of a short-term technical rebound than a long-term value investment.
Buffett’s avoidance of Chinese stocks seems to reflect a broader recognition that value-based investing in China may not yield the same compounding returns as in other markets. This cautious approach is supported by the sharp drop in global active funds' allocation to China, from 15% in 2020 to just 5.1% today.
The large-scale reduction in holdings over the past three years means there's little left to short, leading to some level of repositioning.
However, whether this rebound signals a sustainable rally based on fundamentals remains uncertain.
For now, Buffett’s strategy favours Japan, seeing it as a more stable and predictable market.
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