Morningstar - Q3 2021 - 74

Investors
In places like India or Brazil, the on-the-ground
situation has been so bad for the last
couple months that there are businesses where
the market is not fully discounting an
eventual return to normalcy. You can make the
same argument in Japan: The market has
not fully looked through the crisis, maybe because
the current reality is so grim.
Desmond: In the developed world, there has been
a lot of publicity about the pace of vaccine
rollout in developed countries and the progress
toward returning to normalcy. While it may have
important human consequences, from a longterm
investing perspective, the difference between,
say, a month and two months in terms of
getting vaccination spread throughout a population
is relatively insignificant. However, after
the immediate crisis, there will be risks embedded
in the system, such as additional indebtedness
for governments or companies in certain
areas. Managing that risk and making sure that
risk is properly valued is going to be an issue over
the next few years.
Markets have responded very strongly to the great
news of the vaccine rollout. Valuations, in
many cases, have become stretched, particularly
in the U.S. market. We may have some
fantastic economic news, but the challenge for
investors is being in the right valuation and
component of the market to profit.
Daniels: Investors are increasingly uneasy about
inflation globally. Do you share that concern?
Desmond: We do all of our analysis in inflationadjusted
real terms, as inflation is ultimately
the great destroyer of long-term wealth.
Our models are not saying that there is any
immediate fear of a massive resurgence
in inflation. There's clearly disruption, because
of supply lines, reduced inventory, and changing
purchasing patterns. Everybody's doing
a construction project now. Six months ago,
everybody was buying leisurewear. Most
businesses aren't structured to deal with these
abnormal patterns, so it's not surprising that
you're seeing short-term inflation.
Some inflation would probably be a positive
sign in global economies. I would argue
74
Morningstar Q3 2021
... I'm optimistic that in the fullness of time,
the world will return to normal.
Jed Weiss
that central banks have the tools and the
perspective to address inflation when they want
to. It looks to me as if the market has been
more concerned that central banks would not
address inflation, rather than fundamentally afraid
that inflation would get out of control.
This is an interesting tension between investors
looking forward into the future and
central bankers who are desperate to get
economies recovering.
Weiss: Prices are going up especially for anything
remotely related to housing. Just go try and
buy a pool right now, or a kitchen-and good luck
to you. That's not shocking, given there was
significant underinvestment and there were supply
disruptions related to COVID. I think the jury's
still out as to whether this is a temporary
inflationary shock within specific areas or whether
this is durable inflation. But I am comforted
by the fact that the types of businesses I look for
tend to have durable competitive moats
with pricing power at every point in the cycle.
Chakrabortty: Looking at emerging markets
in general, I don't see inflation as a concern yet;
it is probably something to think about next
year. The demand side is still weak across most
of these countries. But in general, I think
the central banks have enough arrows in their
quiver to tackle the issue when it arises at a core
inflation level.
Morningstar - Q3 2021

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