Economists are assigning a 65% chance of the U.S. economy plunging into recession over the next year. The sentiments are being fueled by fears that the aggressive interest rate hikes by the Federal Reserve will weigh significantly on growth. Economic data led by the Gross Domestic Product has already shown growth is slowing. Amid the fears, investors are optimistic that legendary investor Warren Buffett, defensive plays, and Japan stocks will come out on top amid the recession debacle.
Interest Rate Hikes Effects
Under the leadership of Buffett and his partner Charlie Munger, retail and institutional investors believe that Berkshire Hathaway will outperform the U.S. market and generate significant value for investors. In addition, the investors are also optimistic about defensive stock plays and Japan.
Investors are becoming increasingly cautious and defensive as the FED’s resolve to continue hiking interest rates remains intact. JPMorgan acquiring First Republic Bank and averting a potential bank crisis is already fueling suggestions that the FED will hike interest. As a result, interest rates which currently range between 4.75% and 5%, are taking a significant toll on borrowing costs.
Companies and businesses need help to access the cheap capital needed to navigate challenging economic conditions. The high borrowing costs have also taken a toll on economic activities leading to further slowdown. Consequently, investors have even shunned tech giants and other riskier bets expected to feel the pinch amid the high-interest rate environment.
Berkshire Hathaway Edge
In contrast, Japanese stocks remain attractive given the country’s low borrowing cost. In addition, the Bank of Japan has always maintained low-interest rates as part of yield curve control measures. Similarly, Japanese stocks offer a high earnings yield of 5.8%, slightly higher than the 5.3% on offer on the S&P 500.
Investors are also optimistic that defensive plays will outperform the overall market amid the recession fears. Investors have been pilling cash on defensive plays at the expense of tech plays amid lofty valuation concerns.
The diversified nature of Berkshire Hathaway is what sets it apart from other investment vehicles. In addition, the company has an impressive record of solid returns over the years. In the first quarter, it returned a compounded annual of 9.5%, dwarfing the 6.5% return of the S&P 500.
Berkshire Hathaway has outperformed over the years thanks to Buffett and his team investing in stocks for less than what they are worth. It is his biggest legacy that has always drawn investors into the company. Consequently, a Buffett premium is always reflected in the company’s share price.
Additionally, Berkshire Hathaway boasts a massive cash pile of $130 billion, ensuring it can continue returning value to shareholders. In addition, the company can purchase most of the companies in the S&P 500. Nevertheless, Buffett has always reiterated that the sheer size could work against the company in future
Everything about Berkshire Hathaway’s prospects amid recession fears should become clear when it holds its annual shareholder meeting, often referred to as Jamboree. Investors will wait to see what Buffett and the team intend to do amid the challenging economic condition fueled by high inflation levels and aggressive monetary policy tightening by the FED.