Surprising Momentum: Insights from an Active Summer in the Stock Market

   

For current performance, holdings, and to learn more about the strategy mentioned in this episode please click below:

Cambiar Aggressive Value ETF
Cambiar International Equity ADR
Cambiar Large Cap Value

TRANSCRIPT

Kyle Helton:

Welcome to the latest episode of the QPD Podcast! I’m your host, Kyle Helton, and today we have the pleasure of sitting down with Cambiar President Brian Barish.

Despite the typical slow pace of the markets during the summer months, 2024 has proven to be anything but ordinary.

In this episode, we’ll explore key developments such as interest rate cuts, improving market breadth, pulse of international markets and more. Join us as we unpack these crucial topics and gain valuable insights into the current market landscape!

Brian, welcome back…

Brian Barish:

Thank you Kyle.

Kyle Helton:

The summer months tend to be a slower time in our industry, however this year we saw interest rate cuts, a sitting President bowing out of a reelection race, continued AI frenzy, gold reaching an all time high, S&P & Nasdaq blowing past 2024 estimates, etc.  What do you make of all this?

Brian Barish:

I think if you painted the picture of gold breaking out, of Biden involuntarily leaving the race, even of the Fed starting off a rate cutting cycle with a 50 basis point cut, you’d have thought that the market would be under some kind of stress because gold that tends to be a contra asset. Political instability tends not to be looked upon favorably and so forth, and you’d have been wrong.

It just shows that trying to drive the bus through a macro lens can be very difficult. If you look at the long end of the curve, 10 year yields and 30 year yields, the market has been saying quite loud and clear really since early 2023 that it did not believe that a 5% or greater interest rate was sustainable, that the long-term neutral rate was four or less. And at this point, Powell has chosen to respect that view, armed with the data that inflation is improving a lot.

So that’s really been the story of the last several months.

Kyle Helton:

How are you finding value in this type of market?

Brian Barish:

Markets are making fresh highs, but if you look under the covers, the equal weighted S&P 500 is barely up versus highs reached in late 2021. Obviously, the economy is advanced, earnings have grown, so in valuation terms, there are parts of the market that remain cheaper. I’ll admit that the number of stocks where we’re finding amazing value is shrinking, and so we’re trying to pick our spot carefully right now. What looks interesting to us and where we’re examining more deeply are things in the consumer space and the interest sensitive space, which are a lot of consumer stocks. If you look at the arc of the last few years, there was a supercharged consumption environment in 2020 and 2021, you had shortages of a lot of products relative to demand. That led to a lot of pricing, which in turn led to some overproduction and excess inventory of various consumer products. And as that’s happened, consumers have slowed down. A lot of those names remain well off their highs from a couple years ago, and we see the potential for earnings and for the stocks to revalue as pretty good. From here.

Kyle Helton:

We have seen a shift in market leadership this quarter from mega-cap tech to value stocks. Could this be the beginning of a longer-term trend? 

Brian Barish:

It’s possible that you could be seeing a shift in the trend. I want to make one very important distinction as long as we’re talking this topic, which is the distinction between growth stocks and value stocks. The way I look at the world is there are expensive stocks that have high expectations. There are inexpensive stocks that do not have such high expectations, and at Cambiar we tend to play more in the latter camp. Now, sometimes some stocks have low expectations because they deserve to have low expectations. People cannot get comfortable that the future is going to be any good. There’s other times that you have interesting businesses that have unique products that participate in attractive long-term markets, but they have just become of less interest in the current market. Earlier in the year, you had a tremendous amount of interest in all things AI, that’s cooled off just a little bit. Really all that’s happened is the stocks have stopped going up in the last few months, but that kind of bifurcation of investor interest, that’s what tends to lead to interesting values in what are otherwise pretty interesting businesses. So that’s where we’ve tended to be pursuing things.

Kyle Helton:

Shifting to the portfolios you manage, have there been any notable changes to the Large Cap portfolio in the last three months?

Brian Barish:

The moves we’ve made in the large Cap portfolio have been modest. We added a new bank position in U.S. Bank. There is likely to be a decent tailwind to bank earnings as the yield curve renormalize, and it’s a reasonable idea to be involved there. People have made a lot of noise about potential risks in commercial real estate and whether you’re going to have credit impairments there, we’re very familiar with what those risks are. We sense that there will be some bombs here and there in the banking sector, but they should be manageable by the larger banks in particular. This is a very well telegraphed risk that is unfolding. In addition to that, we bought a position in Comcast early in the quarter. Comcast is doing an interesting job building out its non-linear television arm, and we think there’s some value creation happening there. Outside of that, we saw a few stocks get close to or reach our price targets and we’ve had to let them go. That is a feature of having a good stock market as you will have stocks that do get to fair or full value. We’ve also downgraded our view on energy. We still like it. We just don’t like it as much as we thought we might be liking it, it seems it’s just going to take a couple years to clear off some degree of excess supply in the system.

Kyle Helton:

What about the Aggressive Value ETF, have there been any notable changes or shifts?

Brian Barish:

For the Aggressive Value strategy, I like to buy stocks where I feel there’s a wide gap between not only the current stock price and the upside potential, but where there’s a blue sky investment case that I think has a pretty decent chance of happening. We’ve built up a big position in Bristol Myers, which is an astonishingly cheap stock currently. We thought Comcast also represented a situation where the blue sky investment case would be a lot higher than the current share price.

Kyle Helton:

In an interview earlier this year, you mentioned the need for military and defense stock exposure in your portfolio at all times. For those new to the podcast, what is your rationale behind that approach?

Brian Barish:

If you compare the world today to the world back in 2019, there is one very big geopolitical difference, which is that a unipolar world led by the United States, that view of things just isn’t really playing out. You have different actors, China for its own reasons, Russia for its own reasons, who have a different game plan, let’s say, and do not appear to be materially constrained by what the United States desires geopolitically. So what does that mean? It looks like you need to be much more concerned about regional wars. It looks like you need to be much more concerned about having your own standing army, your own missile defense system, your own air force that can act as a deterrent because maybe the United States doesn’t really feel that it can spend resources to be the world’s policemen. So that has led to a big increase in the value of military companies. Oil has historically been a geopolitical weapon, and if you look at the posture of current Middle East oil producers, it is really only the Iranians that have a beef with the United States and Israel. The Saudis, the UAE, they want to normalize relations with Israel. So it is less of a geopolitical risk, but it’s still out there. And I always feel like I like to own a bit of military and energy in my portfolios, knowing that they will probably be ballast in certain market environments where all kinds of other stuff is going to work. But in those moments when you actually want ’em, first of all, they’re very hard to predict in advance. They’re very hard to position for in advance, and they will be negatively correlated with practically everything else in your portfolio in a good way, in those circumstances.

Kyle Helton:

You recently spent quite a bit of time in Europe meeting with various businesses.  What is your pulse on the European markets these days?

Brian Barish:

Europe is a big place that goes without saying, and while the European economy as a whole, it’s hard to get super excited about it, they don’t have really any population growth. There are not the same number of highly innovative technology driven companies being born in Europe as in the United States, and the regulatory environment is challenging. All that said, there are a lot of companies with strong technical capabilities, strong IP creation capabilities, or just strong global brands and franchises, just given the very wide spread between US valuations and valuations outside the United States. The multiples are far lower and it’s not hard to find value in consumer products, in financial services, in industrial businesses, in specialty materials businesses and so forth. So I think there’s interesting things there. I wouldn’t predicate buying or not buying European stocks or for that matter, international stocks based on one’s view of global macro. That view is apt to move around a fair amount and look more at who has unique products, who participates in strong market structures.

Kyle Helton:

Turning to China, they just announced a stimulus plan that is quite small relative to the overall market. What do you make of this? 

Brian Barish:

We’ve been talking a lot internally about China’s most recent attempts to stimulate its economy and stimulate its stock market. On the one hand, on the negative hand, we do see long-term structural challenges for China. There is a well understood at this point real estate bubble. It’s enormous and there’s excess apartments, excess apartment complexes for that matter all over China, and we don’t see an easy way to cure this problem. So it’s a classic balance sheet recession. On the other hand, China is essentially planned economy and it is easy for centrally planned economies to engage in stimulative activity. There’s been various estimates of how much China’s stimulus might add to GDP. They range from anywhere from one half of 1% to as much as one and a half percent. That’s certainly better than nothing. Our suspicion is certainly don’t chase rallies that are enormous in short term percentages, but you might want to look at soft beneficiaries of a bit more consumption in China and stay away from hard beneficiaries like iron ore and other commodities.

Kyle Helton:

Things seem to be playing out in your favor, the Cambiar International portfolio has been outpacing the benchmark for four straight quarters now.

Finally, turning to the U.S. elections, which are right around the corner and it seems to be a jump ball at this time.  Without getting political, what do you foresee for equity markets considering the various outcomes?

Brian Barish:

It’s interesting, in most election years, markets are weak from about late July until a couple weeks before the election notionally, they become nervous about the political uncertainty and then obviously once the election happens, you have political certainty. You know who is going to be in power and who is not. So it’s been odd that we really haven’t had any kind of an election selloff, and I think the answer to why is not to do with the either politician, but has to do with the Fed and the fact that Powell has moved into an easing position and made it reasonably clear to market participants that the Fed will be trying to get from a restrictive policy to a neutral policy as quickly as it realistically can, and markets have liked that understandably.

That said, I certainly could see political uncertainty jumping into the fray in the not so distant future, and I want to stay away from specific political views and just talk about one general thought, which is a concept called Hauser Law. So it’s named after a economist named Hauser who noticed that no matter what marginal tax rates are, whether they’re extremely high as they were in the 1960s and 70s, or very low as they were in the 80s and 90s or in the middle as they are today, it is almost impossible for federal receipts to exceed 20% of GDP. It just hasn’t happened, and we have a very structural budget deficit currently outlays, or 24% of GDP and tax receipts. They’re not at 20%. They’re actually a good deal below that level right now. So something’s got to give. This is not a sustainable situation. We either reduce spending or implement some kind of new tax policy that is capable of bridging that gap. And that is a political question. What form that takes? I want to stay away from that.

One thought, and I’m not saying that I think this is a great idea, but one idea that I’ve heard repeatedly as having the potential for political traction is a broad based carbon tax. If you wanted to increase revenue durably, having a broad based tax is the way to do it. It’s the way that most countries outside the United States do it. Once you’ve got one of those, it’ll be almost impossible to get rid of it, and it’ll tend to go up over time, which is one reason why I’m not necessarily very in favor of it, but if you believe that global warming is something that we have to be directing a lot of energies on, the best way to do that is to let the free markets and entrepreneurs and the whole creative destruction process have its hands at dealing with this problem. And the way you do that is by having an explicit price for carbon that everybody pays and that that’s how you would get there. So I could see that coming, but it would not be very popular politically for a variety of reasons.

Kyle Helton:

Brian I appreciate your time today. I look forward to chatting with you again at the end of the year. 

And that wraps up another insightful episode of the QPD Podcast!

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For additional resources and insights, be sure to visit Cambiar.com. Thank you for joining us, and we look forward to having you back for our next episode!

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