While market concerns had investors scrambling for the exists, Cambiar Investors took advantage of the market weakness in Q3 to deploy capital into a number of new investments. Read their Q3 2015 commentary below.
"Market Review
After fairly muted performance for the first half of 2015, global equities sold off in the third quarter. In contrast to prior pullbacks that were often met with buyers stepping in to buy the dips, investor sentiment towards stocks deteriorated considerably in the quarter. A popular Wall Street phrase is “stocks climb a wall of worry” – referring to the tendency for equity markets to overcome a host of negative factors and move higher. Yet is seems the wall got too high in the quarter. Global growth fears (led by China), increasing uncertainty of U.S. monetary policy, and continued pressure in Emerging Markets were just some of the concerns that had investors scrambling for the exits. While all of these factors warrant careful consideration, it is Cambiar’s view that the correction in the quarter was of the “shoot first/ask questions later” variety, vs. fundamentally driven. Given our value orientation, such reflexive selling can provide attractive entry points; to that extent, Cambiar used the market weakness to deploy capital into a number of new investments during the quarter.
Emerging Markets
The Cambiar International Equity ADR strategy has had very modest exposure to Emerging Markets (2% currently) in recent years. The portfolio’s active avoidance reflects our view on some of the challenges facing EM; these issues are not easy to solve, nor are they likely to suddenly improve in the near future. One of the most important headwinds is the declining growth rate in China. Over the past ten years, China’s tremendous growth and corresponding voracious appetite for imports helped support growth around the world. Sovereign beneficiaries included peer EM countries (e.g. Brazil) supplying the commodities that the Chinese were dependent upon. The subsequent slowdown in China has had a negative ripple effect on the many markets that were previously benefitting.
A second challenge relates to the strong flows of capital targeting the emerging world, as super-low interest rates and sub-par demand growth in developed markets drove the EM “carry trade”. This trade is now reversing, in part led by a stronger dollar and the inevitability of higher US interest rates. Additionally, the credit boom in many EMs has turned sour, clearly related to issues mentioned above as cash flow, currency and bond market dynamics in EMs turn more pernicious. An aspect of this secular turnabout is worth contemplating: growth in emerging markets is slowing, while the cost of capital is rising. The resulting combination is not helpful for EM equity prices.
A final event which is negatively impacting EM is the concept of “quantitative tightening”. This term refers to the reserve draw-down that is taking place in many countries around the world; from China’s declining reserves, to middle-eastern petro-states, as well as other EM economies facing higher demands for dollars. The easiest way to think about this concept is to remember that EMs had been accumulating reserves for years, due to factors such as persistent current account surpluses and huge inflows of hot money seeking higher returns. The process involved central banks buying dollars, typically “paying” with domestic currencies and often corresponding to significant balance sheet expansion (more cynically: money printing). The capital flows have now reversed, and these global reserve stockpiles appear to be shrinking. This has been called “quantitative tightening” by some, since it is moving in the opposite direction of reserve accumulation/balance sheet expansion. The operative word is tightening. Given all of the above considerations, Cambiar anticipates continued rough sailing in emerging markets; we are wary of attempts to catch the bottom." Download below to read full report.
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