If you are looking for clues on where to invest your capital this year, you might be interested in what Warren Buffett had to say in an interview on CNBC and reported in Bloomberg.
The renowned investor is still bullish on equities even though the US market has surged to record highs recently and some experts are warning of overstretched valuations and the risk of a big market correction.
While Buffett's views aren't about the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) and the Australian stock market, investors here can take comfort from the fact that our market often takes its cue from its US peers as the US market is still used as a barometer for risk appetite among global investors.
Buffett doesn't believe equities are overvalued when you compare them to interest rates. That is even better news for our local market as interest rates here are expected to stay at record lows for most of this year at least, while the US Federal Reserve is poised to lift its rates.
Further, our market has underperformed and the valuation argument is a little less of an issue.
The other big reason why Buffett is a net buyer of equities is because of the cut in US corporate tax rates. Investors shouldn't underestimate the impact of the lower tax burden and he uses his investment in BNSF Railway as an example.
"The government doesn't own the assets of the business," Buffett said. "We own 100% of the assets of BNSF, but we don't own 100% of the profits. And we went from 65% to 79% of the profits of BNSF and that is a more than 20% increase."
Again, most listed Australian companies won't benefit from the US tax cut unless our government follows Donald Trump's lead, but there are a number of blue-chips in our market that have a material exposure to the US and will receive some benefit.
These include gaming machine maker Aristocrat Leisure Limited (ASX: ALL), building material companies James Hardie Industries plc (ASX: JHX) and Boral Limited (ASX: BLD) alongside healthcare device maker ResMed Inc. (CHESS) (ASX: RMD) and insurer QBE Insurance Group Ltd (ASX: QBE) – just to name a few.
Some of these companies may have to take a write-down on their tax assets but this is non-cash and a one-off accounting issue that will largely be ignored by the market.
Finally, Buffett has a warning for those betting on the incredible surge in value of bitcoins and other cryptocurrencies. He is confident that the golden run will end badly, although he can't say when the impending crash will come.
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