Warren Buffett will beat the market in recession times, say investors

Investors are worried about a looming US recession and looking for ways to beat it. A few ideas are in vogue. Defensive stocks. Japan. And — Warren Buffett.

Finance professionals and retail investors reckon that there is a significant price premium embedded in Berkshire Hathaway Inc.’s shares, betting that the conglomerate will outperform the US market, according to the latest Markets Live Pulse survey.

More than half of 352 respondents are confident that the company’s returns over the next five years will beat the S&P 500 Index. The resounding vote of confidence comes ahead of this week’s shareholder meeting of Berkshire, an annual jamboree that has come to be better known as the Woodstock of Capitalists.

Survey participants are keeping the faith on Buffett’s legendary investing prowess as economists assign a 65% chance that the US will enter a recession over the next year, ostensibly a time when his value discipline will shine through.

Returns going forward are very much weighing on investors’ minds, with the Federal Reserve looking to raise rates, perhaps for the last time in the current cycle, on May 3. Survey respondents reckon that defensive stocks will fare better than technology names in the months to come — a conviction that would augur well for Berkshire given that Buffett is likely to avoid the latter category in light of recent lofty valuations.

Buying stocks for less than what they are worth — which Buffett and his mentor Benjamin Graham espoused — will be the Berkshire chairman’s biggest legacy, according to 80% of investors, with his famous letters to shareholders emerging a distant second.His annual letters have, in recent years, shrunk in length. Buffett and his business partner Charlie Munger combined are more than 190 years old. Both of them will regale the audience in Omaha, Nebraska, where doubtless one of the key questions will be about succession.

Investors reckon that there is still a Buffett premium reflected in the conglomerate’s share price, with almost two-thirds of respondents pegging that premium at up to 10%. History says that faith isn’t misplaced: Berkshire’s shares returned a compounded annual 9.5% through the first quarter from the turn of the millennium, dwarfing the S&P’s 6.5% return.

Looking to enhance Berkshire’s returns, Buffett recently visited Japan. Investors agree with Buffett that Japanese stocks offer value with 50% of respondents saying they will outperform US stocks. Japanese stocks offer a prospective earnings yield of 5.8%, compared with about 5.3% on the S&P. Additionally, US stocks face at least one more increase in interest rates. Japanese stocks, meanwhile, enjoy low borrowing costs thanks to the nation’s control of its yield curve.

Another question that is likely to come up at this week’s meeting is about Berkshire’s humongous cash pile.

The war chest, which totaled almost $130 billion last year, is enough to buy most member companies of the S&P 500 individually — or even a combination of them — for cash outright. The S&P’s still-elevated market capitalization in relation to the size of the US economy is likely to be one reason why that cash hasn’t been deployed in size — and until that ratio comes down persuasively, Buffett and his money managers may be reluctant to invest big.

Buffett himself has conceded that Berkshire’s size may pose a drag on its performance, but respondents in the MLIV Pulse survey don’t seem to be losing sleep on that front, with professional investors split right the middle on the cash holdings posing a hurdle to performance.

When asked about their favorite treat among those offered by Buffett’s companies, about 30% chose Coke, which Buffett reportedly partakes of five times a day. However, a good number thought none of the picks was healthy enough for them. But MLIV Pulse respondents seem to be saying: We still believe in Buffett and Munger’s investing genius after all these decades, but not so much their dietary lifestyles.

MLIV Pulse is a weekly survey of Bloomberg News readers, conducted by Bloomberg’s Markets Live team, which also runs a 24/7 MLIV Blog on the terminal. To subscribe to MLIV Pulse stories, click here.

(NOTE: Ven Ram is a cross-asset strategist for Bloomberg’s Markets Live. The observations are his own and not intended as investment advice.)