Team Spotlight

Staying rational in an irrational market

As Morningstar's Market Strategist, Lochlan Halloway spends much of his time analysing the stories markets tell themselves and separating signal from noise. In this conversation, Lochlan discusses the investing principles that have shaped his thinking, why valuation discipline becomes even more important during periods of volatility, where he sees opportunity amid negative sentiment and the market narratives he believes investors should question more closely.

Morningstar has long championed a long-term, valuation-driven approach to investing. How much of that philosophy aligned naturally with your own views when you joined, and how much has evolved over time?

I was familiar with the idea of competitive advantages before I joined. Porter's Five Forces was something I'd come across at uni. What's evolved is a much deeper appreciation for the economic moat framework specifically. Our research team has spent an enormous amount of time thinking through the moat sources, the historical track record of how these businesses perform, and how to identify them across very different industries and business models.

As analysts, our job is to apply the framework faithfully and value the businesses appropriately.

You often talk about “margin of safety” and the importance of valuation discipline, especially during periods of volatility. As Morningstar’s market strategist, how do you help investors stay grounded when markets become especially turbulent?

When we talk about margin of safety, we're primarily thinking about the discount to fair value. I like how Howard Marks puts it: a falling stock price on a fundamentally sound business doesn't increase risk, it reduces it. Most investors read a falling price as a danger signal. The margin of safety framework inverts that. The genuinely dangerous position is paying a rich multiple where everything has to go right and there's no room for error.

As far as staying grounded goes, putting things in perspective helps. Throughout history there have been countless reasons to sell stocks and panic. As Peter Lynch says, the bear case always sounds more intelligent. But the long run chart of equities is up and to the right, though not without painful bumps along the way. Staying diversified, and being very careful with leverage, is how you stay in the game long enough to benefit.

You’ve spoken about opportunities emerging in sectors where sentiment has deteriorated materially. What gives you conviction to lean against prevailing market sentiment?

Conviction has to come from doing the work first. If you just lean against sentiment as a knee-jerk response, you're more stubborn than contrarian. But when you've done the work, there's a useful asymmetry when sentiment is really negative. A lot of bad news is already priced in, and the bar for a positive surprise is low.

Lithium is a good recent example. Mines were closing, sell-side analysts were near-universally bearish, and a meaningful chunk of the cost curve was loss-making. Those conditions can't persist indefinitely for an essential input. And when it turned, it turned quickly.

Being different from the market is what you're paid to do as a stock analyst. But the caveat is, you're not always right. You'll get things wrong, and you need to stay objective, humble, and be willing to change your mind when the facts change.

AI disruption has become an increasingly prominent theme across markets, including in some of your recent commentary. How do you distinguish between companies that are genuinely vulnerable to AI disruption versus businesses where the market may be overestimating the threat?

Our moat committee systematically reviewed 132 companies across our global coverage that we considered potentially vulnerable to AI disruption. The headline finding is that AI is not a universal destroyer of competitive advantages. Most companies came through with their moat ratings intact.

The businesses that held up best tend to sit at the infrastructure layer of the technology stack, own proprietary data that can't be replicated, and have complex regulated workflows. Businesses with "network effects", i.e. the product becomes more valuable as more people use it (think Facebook), were the most resilient. The businesses that are genuinely more vulnerable tend to monetise workflow friction, labour intensity, or seat-based software licenses. IT services and payroll processing are obvious examples.

How should long-term investors think about valuation and liquidity in a world where private and public markets are increasingly interconnected?

I understand why people are attracted to private markets. You don't get live pricing on your assets, and valuations are mostly appraised rather than market-derived. That's psychologically comfortable. But the underlying value of the business is moving just as much as it would in a public market. You just don't see it in the same way.

I think the same core principles of valuation apply in either market. But in private markets you're largely backing the skills of the deal maker, because you usually don't get full visibility on what's in the portfolio or assess the underlying business risk yourself. That's a different proposition entirely to owning public equities, where you know exactly what you hold and can act if circumstances change.

What, according to you, is the most overrated market narrative right now?

This might be the one I look back on and regret, but I'd flag the AI-driven commodity demand story, particularly for copper. There is an obvious bull case for copper, but when you look at who is actually consuming most of it, it's overwhelmingly industrial and construction activity in China. The inventory builds at the major exchange warehouses point to pre-emptive buying rather than genuine AI-driven end demand. Several bullish narratives have collided at once and the result looks like exuberance that's run ahead of the underlying demand picture.

What keeps you busy outside of markets and investing?

Running, reading, playing music, spending time with friends and family. Having interests outside markets keeps you sane and probably makes you a better investor.

What’s the best book /podcast on investing you’d recommend?

Michael Lewis's Boomerang is great. It's a portrait of the 2008 financial crisis told through the countries that blew up in it. If you want to understand where we are today, economically and politically, I think you need to understand that crisis. There's a reasonable argument it put the final nail in the coffin of the free-market consensus that had dominated economic thinking since the 1970s. For something that picks up that thread, I recently finished Viktor Shvets's The Twilight Before the Storm. It draws striking parallels between the fractures of the 1930s and the crossroads we find ourselves at today, and asks whether we have the wisdom to avoid repeating what followed.