In Cambiar Investors' First Quarter Market Commentary, they discuss a wide array of world events effecting their positions.
“The first part of 2015 saw global financial returns transposed versus the back half of 2014. Following a peculiar 2014 where U.S. blue chip stocks generated the only significantly positive returns in U.S. dollar terms, conditions have so far reversed in 2015, with international returns faring better than U.S. returns in both local currency and dollarized terms. Returns have been favorable in most developed nations, though export-oriented businesses with local currency costs and U.S. dollar priced revenues have been especially successful. Overall, markets outside the U.S. registered on average 5% gain in dollar terms and over 14% in local currency terms; within the U.S., returns have broadened – with small cap stocks faring a few percentage points better than large caps (+4% versus +1%). In late 2014, dollar strength and a thirst for yield trumped almost all other investment attribute considerations among stocks, and here too the course reversed quickly in 2015, at least so far. Whereas defensive and yield-proxy stocks dominated results in 2014, these segments of the market entered the year richly valued, and have lagged significantly in 2015.
We continue to believe that an eventual shift away from zero percent interest rate policy (“ZIRP”) by the U.S. Federal Reserve will prove to be the most significant event of 2015, and may re-order many investment priorities. That is our opinion; until this actually happens, it is just an informed opinion and no more than that. It is possible that a move away from ZIRP could be pushed as far as early 2016, but this deferral would postpone the inevitable financial adjustment into the U.S. election cycle, a consequence that we can’t imagine anyone at the Fed would want. In the interim, the introduction of overtly negative interest rate policy (“NIRP”) in Europe and the implementation of aggressive bond buying (“QE”) programs in both Japan and Europe have been wildly successful. As of this writing, over a dozen European countries are borrowing at negative interest rates of up to five years maturity, and at less than 0.3% for maturities as long as ten years out. Because interest rates paid on cash reserves are negative, the treasury departments of most Eurozone banks must play a contorted game of “hot potato” as various financial instruments mature and purchase bonds that either have no yield at all or take some significant duration risks (and they are even running out of room to do this). Whatever the form by which banks choose to manage this process, it is forcing a significant amount of money to chase secure yields without much compensation.
In a world of gigantic long term demographic challenges and de-minimus yields on low risk instruments, there is no alternative (“TINA”) to plowing larger sums of money into riskier investments – be these bonds, real estate, or stocks – to meet actuarial assumptions. This coercive financial logic is dangerous outside of legitimately depressed economic conditions, which is why we believe it is imperative to re-normalize monetary policy away from ZIRP relatively soon in the U.S. That said, it is bond markets and not equity markets where the TINA dynamic has been most potent, leaving many parts of the equity markets still attractively valued. Admittedly, the strike zone is shrinking. But whereas this may be a negative for the prodigious flows into passive equity index funds which own everything, Cambiar can buy what we find attractive, and avoid paying full prices for stocks with debatable potential.In the balance of this letter, we intend to discuss some of the more interesting topics in current equity markets.” Download below to read the full report.
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