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Global Inflation Ticks Upward

Grady Burkett, CFA


How is rising inflation impacting businesses across the globe? International portfolio manager Grady Burkett, CFA, shares his perspectives.

 

The following text is a transcript of portions of the speakers podcast originally recorded in November 2021. This transcript solely represents the views of the individual who spoke, which are subject to change.

Global Inflation Ticks Upward

Grady Burkett, CFA, Portfolio Specialist:

Well inflation in the US is currently higher than in Europe or Asia Pacific. Still, we are definitely seeing higher inflation throughout the world.

So far, the majority of our portfolio companies are managing input costs well. We haven't seen much margin pressure or much issue in terms of delivering supply to fulfill demand. In some cases, margins are even expanding because revenue is still recovering, so there is operating leverage taking hold. And many of our companies have pricing power and they can pass through higher input costs over time.

However, given how dramatically and quickly global supply and demand have changed over the past 18 months, it's not surprising that we are seeing some manageable challenges for our portfolio companies. We have seen a tiny bit of margin compression for some companies, most of which will be worked through. We've seen a couple of areas where the companies have had some delay in supply or reduction in inventories but, again, these are fairly minor.

Now the other consideration is how interest rates respond to rising inflation. Currently, real yields are negative throughout the world and central bank policy rates are well below inflation rates. If short-term rates rise sharply, we could see some earnings benefits to our companies with large net cash positions. So companies like Checkpoint, Facebook, Swatch and Nintendo, for example, could benefit sort of at the margin.

On the other hand, a sharp rise in developed market interest rates could pressure some emerging markets and create some headwinds for our multinationals with a lot of emerging market revenue. Also, Ashmore, our emerging market bond manager, could experience some outflows if investors lower their emerging market exposure. I would note for Ashmore, though, I do think the scenario is partly priced into the current price. We believe Ashmore shares are trading at a significant discount to the company's intrinsic value.

So, in summary, when I look across the portfolio, we see some businesses that could be impacted by higher inflation that’s not currently expected. And we see other businesses—some can be impacted positively, some negatively—but we do build a portfolio that's resilient to different economic conditions, and so I feel comfortable with how our portfolio’s positioned right now.

As of October 31, 2021, Diamond Hill owned shares of Ashmore Group PLC, Check Point Software Technologies Ltd., Facebook, Inc. (Cl A), Nintendo Co. Ltd. and Swatch Group AG.

The views expressed are those of the speaker as of November 2021 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

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