Volatility and high valuations
Berkshire Hathaway (BRK.B) has been delivering a stable operating performance on high market valuations and the improving economy and markets (SPX-INDEX) (SPY). Global markets have been climbing north, and the IMF’s (International Monetary Fund) global growth expectations continue to rise due to contributions from Asia and Europe.
Berkshire is expected to continue drawing revenues from its core businesses of insurance, manufacturing, and BNSF. But some divisions, particuarly its Energy and Services divisions, are still seeing sluggish growth due to oil prices and housing finance.
Rate impact on Berkshire
Meanwhile, the US Federal Reserve is eyeing yet another rate hike in 4Q17, and in 2018, rate hikes will largely depend upon how central banks in Europe and Japan react to the rising rate scenario.
Any rate hike by another major central bank could push the Fed to hike again, and so Berkshire Hathaway has kept its subsidiaries leveraged lower, choosing to sit on high liquidity for expansion and growth plans. For this reason, rate hikes will likely have a relatively lighter impact on Berkshire than on leveraged asset managers, hedge funds, and alternative funds like Blackstone (BX) and Carlyle (CG).
Berkshire could garner higher valuations for its major businesses, as they’re operating on lower debt. But its debt-driven demand businesses, such as housing finance, could see lower demand. The end markets of Berkshire Hathaway offerings could also see lower traction in the medium term to long term due to higher interest rates.