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How Buffett uses $135-bn cash and talks on changing valuation model expected at Omaha: Raamdeo Agrawal


Raamdeo Agrawal, co-founder and fund manager, Ashish Somaiya, MD &CEO, and Gautam Sinha Roy, Senior VP- Fund Manager, Motilal Oswal AMC, discuss Warren Buffett, the Oracle of Omaha, and his changing style of investment with ET Nows Tanvir Gill before the Berkshire Hathaway AGM at Omaha on Saturday night.

Edited excerpts:
It is that time of the year again for the annual pilgrimage to Omaha. What do you expect this time?

Raamdeo Agrawal: A lot is happening. He is sitting on $135 billion of cash. So, we have to see what he wants to do finally. The business value of Berkshire Hathaway is dependent on how he disposes off that $135 billion and it is still increasing and by the year-end, it might be $150-160 billion. It is now seriously large and he must be looking to acquire a company. Last time, there was talk that they were looking at a $150-billion single acquisition. So, at least, there will be a discussion on that.

Second, the valuation model worldwide, one of the discussion in the last two three years has been that equity markets are cheap, at least in US because the bond yields are so low. The 10-year was at 2% or 2.5% and the effective PE multiple was more like 35-40 PE. So, buying the growing asset class at 20 PE made sense as bond does not grow.

But that is changing now?

Raamdeo Agrawal: That is changing now. That will become a large discussion that can the yield spike to 4%, 5% and actually derail the entire equity boom?

But 3% also has always been risky for world markets. The last time we touched 3%, the markets just went into tizzy?

Raamdeo Agrawal: It is a different world. You cannot look back and say that at 3% this happened in the past. This will happen right now, it could be very temporary because the oil. Somewhere oil is playing that nasty kind of thing where oil has moved up very quickly from $60 to $75. That is feeding in all the commodities and is clearly pushing the inflationary expectation, I do not know whether inflation has gone up or not, but inflationary expectation is going up.

So, if oil goes to $100, then what happens to the commodities, what happens to the inflationary expectation and hence the monetary policy response?

What are your expectations? Beside acquisitions, it is going to be about his investment philosophy that everybody would be eyeing, especially since we have come out of a great year. 2017 was a great year for world equity markets. What happens in 2018 and beyond because this has been the longest bull market across the world. Even the mother of all bull markets in the 1990s in the US did not stretch beyond 9-10 years so are we at the tipping point?

Gautam Sinha Roy: He has spoken about the fact that we are probably in that part of the cycle where you are not getting deals because there is a spree of cheap debt filled acquisitions and he does not want to participate in that.

If you read between the lines, he is waiting for that correction in the markets and spiking yields will give him that opportunity to deploy the huge money that he is sitting on. And he quotes, Kipling here that poem “if you really can wait it out and if you do not have debt on your balance sheet, then you would be in a position of power. When that correction happens actually comes in, participate and buy assets cheap.

He has done that in the past, post Lehman and was probably the only guy who was coming on TV every day and screaming that this is an opportunity and he was buying assets. It looks to me like he is waiting for that kinf of an opportunity. The actions that he has taken, things that he has written about what is happening in the overall M&A market and by the fact that he is actually quoting Kipling and reminding us that you have to be prepared.

There could be a correction in the works but a lot of global investors are calling for a correction whether it is in the bond markets or in the equity markets. Dr Mark Mobius also says that US markets could fall 30%. So, this very different from how it was in 2007, there was excess euphoria…

Raamdeo Agrawal: This is all noise. Let anybody say what is going to happen, but what will happen will happen.

Do you think we are at a stage where there could be a steep correction in the markets?

Raamdeo Agrawal: Correction yes, 10% yes, but crash I do not think so. I am talking about India because we are not buying US markets and Indian market going from 10500 going to 9500 is quite possible. But I do not see that kind of spike, that kind of situation. If there is a rout in US markets, it is going to have an impact here also. Maybe we will have a bigger rout then what happens in US. But if it is linked to yield, Europe is still struggling at 1%, German 10-year is still below 1%, Japan is still at 0.1-0.2%. There is a lot of slack but people are scared.

There has been expansion for nine, ten years, tax is getting cut from 35% to 20%, the earnings are yet to come and people are yet to be soaked into the enhanced earnings in the next three, four quarters.

So, a lot of good news is still in the system, there is earnings explosion in US, the yield part, I hope, does not go beyond 3%, 3.25%, 3.5% because there is enough slack in Europe and Japan.

But that seems hard. He has spoken about how debt is a bad risk. Equity markets carry some risk but you should not have debt because that just is bad risk to deal with. But the world is sitting on very high debt. The US debt levels have gone to $20 trillion which is double of what the level was in 2006-07. Could that be a tipping point where defaults could come?

Ashish Somaiya: It is basically part of a cycle. One does not know where the music is going to stop or where the tipping point is going to be. You look at it the other way around. For example, he mentioned that nobody knows what happens when corporate tax rates are cut from 35% to 20%. He said that they had a windfall gain of $29 billion, of which he is committed to investing 90% back into the US itself.

Early cycle of rate hikes is always very bad for bond markets and very volatile for currency markets but as far as earnings or corporate growth or as far as stock markets are concerned, it is very difficult to forecast how much further you will actually get carried along on the way.

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