By the time we get to view the third-quarter update from Berkshire Hathaway (US:BRK-B) we should know who will be the 47th president of the United States. But the conglomerate holding company’s recent August update had many analysts thinking that political considerations were already high on the agenda. It could be that Warren Buffett has built up his war chest ahead of an anticipated slowdown in the US economy, a possibility given the extent of the group’s cash holdings, but there could be a more prosaic explanation.
Leaving aside loss reserves tied to its insurance operations, Berkshire Hathaway held $272bn (£211bn) in cash and US Treasuries at the end of June, a 67 per cent increase since December 2023. It is also broadly equivalent to the aggregate value of the group’s publicly traded equity portfolio. The increase was somewhat at odds with the trend established by US fund managers in the early part of the year. And although no clear consensus has emerged as to how investors should approach their cash allocations, it is perhaps instructive that assets within money market funds remain at elevated levels.
Much of the comment surrounding the second-quarter update centred on the group’s shrinking stake in tech giant Apple (US:APPL), a company recently described by Buffett as “an even better business” than both Coca-Cola (US:KO) and American Express (US:AXP). Together with Chevron (US:CVX) and Bank of America (US:BAC), these stocks account for 72 per cent of the aggregate fair value of Berkshire Hathaway’s public equity holdings. Yet Apple’s share of the total allocation to public stocks has declined rom around 50 per cent at the end of last year to 30 per cent. And since midway through July, Buffett has offloaded around 14.5 per cent of Berkshire’s stake in Bank of America – the group’s third-largest equity holding.
Buffett has often pointed out that he and the late Charlie Munger focused on the quality of individual businesses rather than external factors to guide their capital allocations. So it might be difficult to arrive at any meaningful conclusions from recent events. But in an election year either side of the Atlantic, there could be overlapping areas of concern where UK investors and their US counterparts are concerned.
Rachel Reeves is set to deliver her maiden Budget speech as Chancellor a week before US voters go to the polls; events that could have a material impact on capital gains policies in both economies. The Democrat Party Nominee Kamala Harris has announced plans to tax unrealised stock gains, while Reeves has refused to rule out new inheritance and capital gains tax rises.
The proposed change in the US would only directly affect people with a net worth of at least $100mn, although given the volatility of risk assets, it’s difficult to envisage a workable taxation model on this basis. Amongst other questions: how would you prudentially account for losses when the unrealised value of an asset declines?
A prospective Harris administration also plans to hike the federal corporate tax rate to 28 per cent, while raising the top capital gains and dividend tax rate to 44.6 per cent. Other proposals in the pipeline extend to new tax charges on share buybacks and carried interest. The list goes on.
The UK government is treading a similar path, simultaneously constraining the means towards private wealth creation while reiterating its nominal support for UK equities. History suggests that given the steady drip-feed of negative budget warnings in the UK media, the upcoming measures will fall someway short of our worst fears, although it’s conceivable that Reeves could bring capital gains in line with the top rate of income tax at 45 per cent.
Whatever the rights and wrongs of the upcoming tax changes and their eventual shape, it would be safe to assume that they will have a cooling effect on markets. Buffett was as sanguine as ever about the government’s tax take in his recent review of Berkshire’s second-quarter figures, But it’s entirely understandable why he might have acted if he believed that cumulative taxes would outstrip forward gains, even given Apple’s stellar performance down through the years. And though Buffett’s investment philosophy lends itself to long-term holdings, Apple’s forward rating of 34 times FactSet consensus, coupled with a price/earnings growth ratio of 3.5, may even be a bit rich for the great man considering faltering iPhone sales and a squeezed market share. All eyes will be on the launch of iPhone 16 on 9 September.