Global Opportunities: Navigating International Markets in 2025

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Cambiar International Equity ADR

TRANSCRIPT

Kyle Helton:

The world of international investing presents a unique set of challenges, geopolitical risks, currency fluctuations, and a diverse economic landscape. But with those challenges come distinct opportunities. As valuations in the US continue to climb, multinational companies outside of the US are becoming more attractive, offering compelling prospects for investors looking to diversify and reallocate some of their gains.

Welcome to the latest episode of the QPD podcast. Today I’m excited to have Di Zhou, Portfolio Manager for Cambiar International Equity. With over 23 years of experience in global equity investing, Di has a deep understanding of the international market dynamics and will share her insights on key areas she’s focusing on as we approach 2025. Di, welcome to the show.

Di Zhou:

Happy to be here.

Kyle Helton:

For roughly a decade now. Investors have been rewarded for favoring US markets. As we sit here today, valuations in the S&P 500 remain elevated and investors are starting to look for opportunities to reallocate capital. What are some unique attributes and opportunities that international markets offer allocators?

Di Zhou:

So international market by definition is multi-market versus the U.S., a single market. So at any given moment, those markets could be on different parts of economic cycles. So for example, in the US, we have been able to avoid a recession up until now versus say Germany, they’re still struggling to try to come out of recession right now with PMI still under 40. As a result we see different central bank actions, right? So normally central bank tend to be coordinated with their actions, but today we’re seeing, for example, Bank of Japan is in the middle of tightening their monetary policy as opposed to U.S. Fed, ECB, BOE are all kind of in the middle of easing cycle and that presents opportunities. On top of that, fiscal policy could also be very different, right? So for example, we saw during COVID, U.S. government able or willing to sense stimulus checks versus European government took a much more conservative approach on that.

And today the very topical issue is French government is trying to implement temporary higher corporate tax for large French companies. And clearly, that news doesn’t sound very good to French companies, but doing our bottom-up fundamental research, what we’re seeing is a lot of the French multinationals are already offsetting their French profit against their French headquarters costs. So the impact is actually a lot lower than initially thought. And perhaps when we do have this temporary corporate tax increase passed by parliament, it could actually be an improvement in sentiment because French stock has been under a lot of pressure because the geopolitical turmoil we’re seeing in French politics. And if the parliament proved to be that they actually could get something done that could be positive in terms of sentiment in French investing.

Kyle Helton:

On the flip side, what are some additional inputs and risks we should consider when investing internationally?

Di Zhou:

Geopolitical risk though has been top of mind for a lot of people as of late. So specifically we saw in Europe in 2022, energy crisis was very pronounced because Russia invaded Ukraine and stopped cheap gas flowing into Europe. And the affordability and the availability of power was a very key consideration for Europe, and that in turn presented very interesting investment opportunities and challenges at that time. The other aspect to think about is national protectionism. So we have been talking about tariffs and not just from U.S. to other countries. A couple of weeks ago, EU also finalized their tariff on China EV makers as well and national priority, it could be very different across the country. So in the US we’re very lax about carbon emissions. In Europe, they are moving toward carbon tax and even carbon border adjustment tax, and that actually increased cost for a lot of companies doing business in Europe, and that again, presents opportunities. The last and not least is currency. Currency is a key aspect for investing in international markets. And not only when we think about multinationals, they both have translation and transaction impact from currencies. And on top of that they have their own currency hedging program. So as an investor we really want to be cognizant that our return in local currency does not get wiped out by currency movements, therefore analyzing currency exposure and managing currency risk, it’s also a key aspect of risk management at portfolio level.

Kyle Helton:

With all of these variables, how is your team vetting potential investment candidates for our portfolios?

Di Zhou:

At Cambiar, our investment process consists of what we call QPD, which is quality, price and discipline. So what is quality company to us? We think about quality company as a durable business that can sustain competitive advantage and therefore be able to generate excess return over long-term. And how do we identify those companies? We look at it from both qualitative perspective and quantitative perspective. From qualitative perspective, we want to really focus on competitive advantage – why this company can sustain those competitive advantage. Do they have unique market positions? Do they have a special product, or do they have a very unique know-how in what they’re doing and that can enable them continue to sustain their competitive advantage or market share. From quantitative perspective, we want to see financial numbers that backs up the qualitative narrative. And specifically we’re looking for top line growth, margin profile of the company, return profile, like especially return on invested capital, leverage, and free cashflow profile.

So we want to look for a company that has both the qualitative and quantitative attribute that fits our criteria to be on our consideration list. The second part of the QPD process is what price to pay. The entry points determines the future return generation for our portfolio. Good companies don’t always make good stocks and we’re not going to pay whatever price for high quality and we’re also not looking for the cheapest company to invest in. We want to invest in the quality company at the right price. We are also patient enough to wait for the price opportunity or valuation dislocation to come to us. There are a lot of disruptions in the market. It could be geopolitical, it could be central bank actions, and we do see those opportunity come to us and then the high quality company do become discounted. The third component of our investment process is discipline, and that means discipline in adhering to our investment process, our underwriting process, and our portfolio construction and risk management process. We construct a very focused portfolio of 45 to 50 names with high active share, which allowed us to look and act different than the benchmark. However, we want to make sure that our portfolio does not take any unintended risk and let stock selection be the driver of our performance

Kyle Helton:

Turning to China, where we continue to be underweight. They recently announced details around a stimulus plan to jumpstart their economy. Is there enough there to get you excited about Chinese businesses or companies that may benefit from a healthier Chinese consumer?

Di Zhou:

Yeah, so if we think about the Chinese economy has deteriorated over the last couple years, both from wealth effect, and that’s specifically from equity market and property market, and income effect because we’re seeing unemployment rate going up and salary cuts and that really impacts sentiment. And during the last couple years we have seen China periodically construct a stimulus packages. However, the property market is a tougher fix and it is a very big issue for Chinese consumers. And the property market problem is different than what we have here in the US back in 2008. In 2008, our problem is more household balance sheet leverage problem. In China, it’s more about a wealth effect problem because the ownership is much higher in China, 90% of people in China own homes. Although they don’t lever up their balance sheet, it represent a very big chunk of their total wealth. So seeing property market continue to price down every year, it’s having a significant negative impact on consumer sentiment and therefore consumer spending. The current tools that offer by the government to fix the property market, from our perspective, not anything new is still the same old set of tools they’ve been talking about, and therefore we’re not seeing any tangible actions to address this structural problem that led us to change our view on Chinese stocks.

Kyle Helton:

Getting into portfolio construction. Is there anything notable at the sector or regional level?

Di Zhou:

So our portfolio currently has a slight overweight to Europe and a slight underweight in Japan throughout the year. We have trimmed down some good performers in Japan and therefore reduced overall Japanese weighting. Japan is a very interesting market in our mind. In the past decade, underweighting in Japan has been a good strategy for most of the international managers, including us. That has changed a little bit over the last two years with inflation started coming into the Japanese economy and with BOJ feeling comfortable to enter into a tightening cycle with Tokyo Stock Exchange, pushing harder on reforms and making Japanese companies divest some of the non-core product, therefore increasing overall returns. So we think those are all very encouraging signs. However, on the flip side of things, valuation has went up for the good companies we like, so we’re continuing to look very hard in Japan, and then trying to own the higher quality companies at a reasonable valuation.

Kyle Helton:

What are some areas of the market that you’re most excited about moving forward?

Di Zhou:

We actually think European consumer could be one key area for next year. So European consumer has been under pressure compared to U.S. consumer over the last three years because European consumer has faced more headwinds, such as in 2022 they faced elevated energy bills and costs by energy crisis when Russia invaded Ukraine and cutting off the cheap gas to Europe. And subsequently we saw mortgage repricing cost a higher mortgage payment, especially for UK homeowners. And the subsequent recession really also put a damp on consumer sentiment. We’re seeing those headwinds and start to reverse and easing to a certain extent and in combination of attractive valuation, that’s why we’re becoming more constructive.

Kyle Helton:

Can you share some details on a position that stands to benefit from this outlook?

Di Zhou:

One example I can talk about is Porsche. Clearly it’s a very iconic brand in automotive space, has a tremendous consumer following. And why we like Porsche versus some other European automotive companies is we all understand that automotive industry has been facing tougher time with lower volume sales and also slower EV adoption. Porsche compared to other European OEM we think will be in a different position in 2025. Most European OEM next year will face tough volume growth and also price mix headwinds. For Porsche, we’re seeing very different in 2025 because they have launched new models in 2024 will be in full availability in 2025. So even though volume might be under pressure, we see price mix will be very positive going to next year and therefore we’ll have a different earnings growth profile versus their global peers.

Kyle Helton:

Since you’ve taken over as PM, we’ve begun to see a noticeable shift in performance. In a challenging environment like 2024. What can you attribute to the strong relative performance of your portfolios?

Di Zhou:

We’re very encouraged by year to date performance, especially when we dissect the performance drivers and majority of the outperformance came from stock selection, and specifically it’s a broad base stock selection. We’re very happy to see some of the longtime names in the portfolio has been working very well this year and we have also been very disciplined this year, trimming some of the position names when valuation exceeded its fair range and continuing to deploy capital into more attractive valued company. We’re further encouraged by the summer months and October, when the market declined significantly and our portfolio was able to provide downside protection, which further validates our QPD process. We are very confident to be able to continue to deploy capital in those attractive areas and therefore continue to outperform in the coming months and years.

Kyle Helton:

And that wraps up another insightful episode of the QPD podcast. A big thank you to Di Zhou for sharing her expertise on international markets, China’s stimulus plan, and unique opportunities abroad. If you’ve enjoyed today’s conversation, please subscribe, rate and leave us a review. Your feedback helps us continue to bring you valuable content. For more information about the Cambiar International Equity portfolio, be sure to visit cambiar.com.

Until next time, take care.

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