Morningstar - Q3 2021 - 76

Investors
valuations perhaps because of the regulatory
issues at the end of last year.
Tencent is another high-quality company with
a strong competitive advantage within Internet
community platforms-instant messaging, gaming,
and community-based businesses-and is
expected to deliver very steady net income growth
of 20%-plus, with a strong balance sheet.
Weiss: I have to restrict my comments to my
thought process as of our most recent public
portfolio on March 31. Pradipta did a good job of
summarizing why both companies are dominant
within their areas of focus. And they both
looked cheap versus global peers as of March 31,
especially because they've made loss-making
investments that will either, presumably, prove
successful or be discontinued in the medium term.
There are also challenges. There are
competitors like Pinduoduo PDD and JD.com JD
going after Alibaba's e-commerce business,
and ByteDance going after some of Tencent's
advertising businesses. And there's the regulatory
crackdown. Time will tell whether either
one of those challenges will prove permanently
disruptive to the strength of these franchises
in the long term.
Daniels: Pradipta, you invest in frontier markets. Are
any countries poised to be the next China?
Chakrabortty: China has been unique. Its
transformation from a heavy-industry- and
infrastructure-led economy to a skilled-labor-based,
Internet-driven economy investing very heavily
into R&D has been remarkable. In fact, Chinese
investment into R&D is now comparable to
the U.S. and way above European investments.
You're unlikely to see this happening at this
scale in any other market as quickly as it has
happened in China. But as industries evolve, we
do see trends rhyming across different markets.
The frontier market that is closest is Vietnam,
which is also transforming very rapidly. It's among
the largest producers of smartphones globally.
It's not just cheap labor. Vietnam is replicating the
Chinese model of an end-to-end supply
chain that's efficient and low-cost and that works.
Vietnam is a very attractive frontier market.
76
Morningstar Q3 2021
Future Themes
Daniels: For all three of you, what geographical
or technological market do you see as having the most
promise 20 years from now?
Chakrabortty: We find the entire industrial
automation and the robotics space very interesting.
China is the world's factory, with close to
30% of the global share of manufacturing output.
Low-cost labor was one of those big drivers
of that, and the second big driver was
the establishment of a supply chain with excellent
logistical efficiency that was unmatched across
any other country.
However, in the last five years, wages have been
rising in China. Compared to markets like
Vietnam, Cambodia, and other Southeast Asian
countries, China's labor cost advantage is
decreasing, so we're seeing increasing emphasis
on industrial automation. Because of their
investment in R&D and education, you have
a massive number of engineers and other
technical staff that are available at a fraction of
the cost in markets like the U.S. and Europe.
That massive pool, along with the end-to-end
supply chain in the background, is fueling
the beginning of the automation and robotics
business there.
Outside of China, we find businesses like the
software services businesses very attractive.
COVID has given a boost to digital transformation
across different verticals. Consumer-facing
businesses want to improve their consumer
interface. Banks are getting into digital banking.
Entertainment companies like Disney DIS
are improving customer experiences on their apps
through more personalization. We own
stocks like Tata Consultancy Services TCS:IN,
an Indian company, as well as a Belarusian
company called EPAM Systems EPAM.
We're seeing a very strong order pipeline for these
businesses. We're perhaps in the beginning
of a multiyear digital transformation.
Desmond: As an alternative to software and
emerging markets, I would like to highlight
an investment idea that may appear less exciting
at first glance. The energy transition will be
an important element for the global economy over
the next 30 years. If we are going to meet
many of the climate goals that we're targeting, we
need significantly greater use of electricity.
Many southern European utilities have transitioned-not
completely but significantly-away
from thermal generation. They're leaders in
renewable generation in their home markets and
increasingly big players in renewable generation in
North America and South America, as well.
These companies have secular growth supporting
them. Significant investment will need to be made,
and they are generally in regulatory environments
where they will be supported for making
that investment. They stand to underpin
much of the secular climate adjustment that needs
to happen. We believe these are relatively steady,
attractively valued investment opportunities.
Japan's an industrial country that has been
consistently reinvesting in its technology, and is
a leader in many areas of electrification,
particularly electric vehicles. Its companies are big
producers of components for electronic goods.
They are involved in digitization and energy
efficiency as well. So, while we're used to hearing
the demographic story or the debt story
on Japan, there is a competing narrative that's
potentially very attractive.
Weiss: To pick up Liz's point on southern European
utilities: Alternative energy is going to be a
major growth theme over the next 20 years. There
are different ways to invest along that theme,
including consolidated equipment plays in wind,
electric vehicles, and solar.
Machine learning is another important theme.
It's going to affect all of our lives, and it
crosses a lot of sector bounds. The semiconductor
industry is a big beneficiary there. And within
semiconductors, extreme ultraviolet lithography
and follow-on technologies like high-NA are
basically the gatekeeper technology to continued
progress in Moore's law. That's probably
more of a 10- to 15-year theme, maybe not 20-plus,
but it's still a long-term opportunity.
From a geographic perspective: India. It has
1.4 billion people. Although there've been fits and
http://www.JD.com

Morningstar - Q3 2021

Table of Contents for the Digital Edition of Morningstar - Q3 2021

Contents
Morningstar - Q3 2021 - Cover1
Morningstar - Q3 2021 - Cover2
Morningstar - Q3 2021 - 1
Morningstar - Q3 2021 - 2
Morningstar - Q3 2021 - Contents
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Morningstar - Q3 2021 - Cover3
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Morningstar - Q3 2021 - M1
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https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q2
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https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q4
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https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131011
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https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120607
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https://www.nxtbook.com/nxtbooks/morningstar/investorconference2012
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121201
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https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809_lincoln
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