Why Warren Buffett would be a fan of Macquarie (or at least part of it)

Back in June, Warren Buffett’s Berkshire Hathaway raised its stake in five Japanese trading firms – Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo – to an average of 8.5% .

The five firms are the largest of Japan’s ‘sogo-shosha’ or general trading companies, and focus on diversified long-term investments that prioritise cash flow and value. Traditionally, they act as intermediaries for importers of energy, minerals and food and exporters of finished products.

Berkshire Hathaway said it plans to hold its Japanese investments for the long term, with plans to raise its stake to as much as 9.9%.

So what does this have to do with Macquarie (ASX: MQG)?

Meet Macquarie’s Commodities and Global Markets division

Macquarie operate four key business units including:

• Banking and Financial Services (BFS)

• Macquarie Asset Management (MAM)

• Commodities and Global Markets (CGM)

• Macquarie Capital (MacCap)

The CGM business has been the main driver of earnings growth in recent years. 

Source: Macquarie announcements

That’s a sixfold increase in net profit since FY18 and now contributes a little over half of Group net profits.

What does CGM do?

Macquarie describes its CGM division as a “global business offering capital and financing, risk management, market access, physical execution and logistics solutions to its diverse client base across Commodities, Financial Markets and Asset Finance.”

 Here are a few specific examples of CGM offerings:

• Power, gas and emissions: Offering physical offtake and supply, transport optimisation, trading and hedging, market analysis and financing solutions

• Agriculture and oil: Hedging and risk management, physical logistics and storage systems, access to pipeline capacity, supply chain solutions and financing solutions

• Resources: Technical and fundamental insights, liquidity in both derivatives and physical markets, equity and debt solutions and logistics services

If you described these offerings to a Japanese person, they might tell you it's a ‘sogo-shosha’.

Why is this segment performing so well?

Trading houses thrive off volatility and inefficiencies. The aftermath of COVID, Russia’s invasion of Ukraine, geopolitical tensions and rising interest rates has created just that.

In the past three years, we’ve seen oil prices trade from US$60 a barrel pre-COVID to a briefly negative US$37 in April 2020 to a peak of US$125 in March 2022. But it’s not just oil – Commodities including natural gas, nickel, lumber and more have all experienced extreme price swings.

Bringing this back to Macquarie, the company attributed the 54% rise in CGM profits in FY23 to:

• “Inventory management and trading income increased substantially driven by trading gains from regional supply and demand imbalances primarily in North American Gas and Power markets.”

• “Increased risk management revenue reflecting strong contributions across the platform, particularly from Gas and Power, Global Oil and Resources due to increased client hedging and trading activity as a result of elevated volatility and price movements in commodity markets.”

All good things come to an end

Macquarie had mixed things to say about its 1Q24 CGM outlook this week.

• Commodities: “Performance significantly down on prior corresponding period, largely driven by reduced trading activity across Gas and Power. Underlying client hedging activity remained resilient with lower volatility and prices.”

• Financial markets and asset finance: “Strong client activity particularly in foreign exchange, fixed income and futures … Consistent balance sheet deployment.”

Of course, CGM accounted for only half of Macquarie’s FY23 net profits and Buffett might not be a big fan of the other half – Given his recent buys in sectors such as homebuilders and energy (and 49.8% of Berkshire’s portfolio is in Apple).