The first quarter of 2020 was startling in so many ways, but mostly in the sudden manner in which it dramatically impacted our lives on both a professional and personal basis.  Stepping back for a moment, Cambiar Investors would like to extend our best wishes to all of our clients and partners; the focus on numbers and financial statements can sometimes obscure the fact that this is also a people business.  We hope you and your families are staying safe in these uncertain times, and to those who experienced personal loss in the current health pandemic, please accept our heartfelt condolences.

International equities incurred a sharp decline in the first quarter of 2020, as fear and uncertainty regarding the coronavirus outbreak catalyzed investors to move to the sidelines.  After originating in China, the coronavirus has swept across the globe, wreaking havoc on a personal, societal, and economic basis.  The unprecedented reversal in equities was profoundly negative, with all sectors and regions posting losses for the quarter.  In less than a month, market participants have had to shift their mindset from guessing when the bull market will end to now thinking about when the bear market will end.  The monetary and fiscal responses from governments/central banks around the world helped to mitigate additional losses (particularly in the credit market), yet questions remain on whether these actions will be sufficient.  It is almost certain that additional stimulus measures will be forthcoming.

Bear markets typically come in one of three forms: event-driven, cyclical, or structural.  The current period is an event-driven bear market, with the coronavirus as the obvious spark.  There may also be some cyclical underpinnings to this bear market, as it is taking place in the latter stages of a long economic cycle.  Unlike a market correction that is relatively shallow in magnitude and shorter in duration, bear markets are much more damaging, disorderly, and volatile. This volatility was evident during the quarter via the sharp moves that were taking place on a day-to-day basis.

Recognizing that no two bear markets are alike, the ‘good’ news with an event-driven bear market is that they typically tend to be faster in/faster out in nature.  Although the extent of the current contraction is still unknown, many strategists are calling for a rebound in global growth for the second half of 2020, and a continuing re-normalization of economic activity in 2021.  Cambiar generally agrees with this outlook, although our efforts remain more focused at the company level vs. calling the market bottom.  It is clear the world is very much on the timeline of the COVID-19 virus.  As such, a stabilization in new patient cases will be an important marker for investor sentiment, while recognizing that the economic fallout in the form of lost jobs and shuttered businesses will continue to linger.

So how does one navigate a bear market?  One observation is that the quality of price signals in panic markets is inherently poor – with moves to the downside (and upside) exacerbated by a more indexed market structure.  Given the wide dispersion of stock returns that accompany a bear market, the current environment provides a significant opportunity for active managers such as Cambiar.  The objective at Cambiar is not to jump at those names that have incurred the biggest price dislocations.  Rather, we are looking to ‘quality up’ the International Equity portfolio in select companies that had been previously unattainable for valuation reasons.  We believe this intentional skew towards quality should enable our portfolios to provide a degree of downside protection as the bear market continues, while still participating in the eventual recovery.