What are the implications of the Russia-Ukraine crisis for value oriented, international equity investors? David Herro, Partner, Deputy Chairman, Portfolio Manager, and CIO-International Equities at Harris Associates, shares his views along with other macro factors on his mind, in this interview.

As an international equity manager, how are you viewing the situation?

I think a great deal of my answer depends on the longevity of the war. If the conflict is short-lived, for either a good reason or a bad reason, I think it will have a muted impact on the global economy. For the current situation, the good reason being the conflict is repelled and they go to peace talks and there’s a cease fire. The bad reason being Ukraine’s overwhelmed and Russia takes it over.

If the war drags on, there will be greater uncertainty, which will have reverberations on interest rates, etc., which will mean longer-term impacts.

How are you managing the volatility these days?

In essence, it's the same game plan as what we've been doing for more than 30 years. We focus on what the underlying intrinsic value of business is. And if "Mr. Market" moves in a violent and aggressive direction different than fundamental value, we react by adding or trimming our investments. And in this case, recall that the value of business isn't just the next week or month or quarter, it's the present value of all future cash flow streams.

So, when companies' prices drop 20, 30, 40 percent in a couple of weeks, and you are convinced the underlying intrinsic value has not, then opportunity awaits – whether it's adding to existing positions, which we believe have been unfairly hit, such as areas like the European financials sector, or even adding a few other businesses. Volatility provides opportunity, if you have the nerves and conviction for it.

Is there any chance that Ukraine ends up in the European Union?

From what I've seen, they're kind of fast tracking it, but it will take a while for Ukraine. It's just the mechanics of the system.

How long does the Russian market stay un-investable?

I think as long as Putin is there – it's un-investable. Period. And I think the only resolution from the world against Russia is for Putin to somehow leave. As long as Putin is there, it'll be, as of last week, the world against Russia, which is sad. There are a lot of great Russian people who are paying the price.

With China having watched what is happening to Putin right now, would they dare make a play for Taiwan?

I think this definitely makes it harder for them. I don't think China wants to be ostracized by the world.

What is your opinion on China's zero-Covid policy?

It's what is to be expected from an economy run by a command economic structure. They want to show who's the boss, similar to the regulations enacted on certain sectors of their economy by the way. Therefore, they exercise this authority. Is it good? I really don't think so because you're not going to stop Covid, first of all, as we all know. And number two, the impact on the global economy – it will heighten the supply chain issues that we're already experiencing. Now they've managed to do workarounds. But I think, most importantly, it's not a good policy because it's just an authoritarian move that is not at all corroborated by proper science.

Let's shift to inflation. Is it transitory or permanent?

I think there's both. Transitory, due to advocating of demand policies over supply policies. And as the pandemic unwound, a complete incorrect economic policy was instituted; the supply side should have been focused on rather than the demand side. So this is causing transitory inflation. And then more permanent inflation exists because there is too much monetary stimulus in an environment where the velocity of money will stop falling.

Central banks around the world have been bailed out by a low velocity of money over the last decade, which was caused by the recapitalization of the global financial system post the Financial Crisis of 2008-2009. All these banks had to build reserves, from 3 or 4 or 5 percent of capital to 12-13-14%. And now, there is too much money in the system, especially when you have velocity picking up. So that's the structural aspect that has to be dealt with – with monetary policy. So, I believe the solution to inflation is you have to tighten monetary policy and you're going to have to advocate supply-side policies.

Is the great resignation happening elsewhere in the world, or just the US?

It really seems to be more centered on the US. You see a little bit of it in the UK, but less so in continental Europe. The US, by the way, is one of the more flexible labor markets in the world too, which also makes it easier. The European and other labor markets aren’t as flexible as the US market.

I believe flexibility in the labor market in general is a good thing because resources flow to where they're being called. But you know, we'll see how much of this is permanent.
This material is provided for informational purposes only and should not be construed as investment advice. All investing involves risk, including the risk of loss. The views and opinions expressed are as of March 3, 2022, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. Past performance is no guarantee of future results.

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