- Key industries like manufacturing in China, Japan, and South Korea are on the decline.
- Warren Buffett’s $130 billion cash pile will put Berkshire in a strong position to make big acquisitions.
- The patience of Buffett is starting to pay off for investors.
Manufacturing is slowing down and major economies are being frozen as millions of people have been thrown out of the workforce. The coronavirus has put the global economy at risk of a long-lasting recession, and Warren Buffett ‘s patience is paying off.
Buffett’s Berkshire Hathaway has not made a major acquisition since its $37.2 billion deal for Precision Castparts Corp. in 2017. Having missed out on its bid for a technology company last year, Berkshire has stayed out of the market throughout the last three years.
Coronavirus will put everything at a discount for Buffett and Berkshire
Earlier this month, Berkshire Vice Chairman Charlie Munger told Bloomberg in an interview that the company is becoming more pessimistic in using its cash pile to acquire companies.
He said:
We were more optimistic about being able to intelligently use our money elsewhere. We’re gradually getting more pessimistic.
Berkshire likes to use its cash to purchase companies that are deemed undervalued based on their current valuation.
Often, such deals emerge when the stock market begins to enter a correctional phase or a fear hits the market due to unexpected variables, dropping the valuations of businesses.
Over the next 12 months, the coronavirus outbreak, which the World Health Organization (WHO) warns it could turn into a true global pandemic, is likely to place immense pressure on the equities market and other major sectors like manufacturing.
In countries like Japan, South Korea, and China, key industries like manufacturing have started to decline, with reports saying that millions of companies in China are now having cash-flow issues.
The negative impact on major economies imposed by coronavirus would significantly decrease the value of companies, stocks, and real estate, as investors panic-sell in response to the outbreak.
The correction of the global economy would leave deals open for the liking of Berkshire and Buffett, who historically waited out for long periods of time to find the right deals at the right price.
The patience of Buffett is beginning to pay off and over the next year, Berkshire is expected to engage in a variety of deals as stocks sell-off continues.
How bad will the correction be?
Following the abrupt 1,200-point drop of the Dow Jones Industrial Average (DJIA) on February 27, investors have started to express concerns towards a bigger pullback in the equities market.
Central banks across Europe and Asia have introduced various stimulus packages in 2019, at the height of the U.S.-China trade war.
It remains uncertain whether central banks have enough to further catalyze the economy in the near-term if the coronavirus outbreak continues to lead a market correction.
With no recovery in sight and no vaccines to be distributed for the next 11 months, the decline of the global economy could be merely kicking off.
During a recession, the stock and housing market tend to take the biggest hit, and as CCN.com reported, Buffett said seven years ago that he is interested in purchasing a significant amount of single-family homes.
This article was edited by Samburaj Das.
