Insights

Of late, people are blaming a variety of economic ills on an unlikely villain: the desire of investors to earn good returns on capital. But, no industry can be expected to survive if it is not creating value for the investors in that industry. Earning good returns on capital is not an obstacle to satisfying consumer demands; it’s what enables companies to continue to satisfy those demands.

It has been a vicious year for cryptocurrencies and even “stablecoins” have not been immune. In this paper we examine the potential for contagion into traditional asset classes, what may be propping up the up the crypto sector and the regulatory outlook.

During the past two years, CBDC has progressed from a bold speculative concept to a seeming inevitability and will soon be a core feature of our financial ecosystem. The rollout of CBDCs will further accelerate the digitization of the economy, which is the key defining feature of markets over the past decade. This paper explores the implications for monetary policy, the FinTech and payments sectors, and the potential disintermediation of significant swaths of the commercial banking system.

The Cambrian explosion of exciting breakthroughs in AI, autonomous driving, 5G, and cloud computing will drive double-digit growth in semiconductor revenues for the foreseeable future. Superstar firms have come to dominate all subsectors of the increasingly concentrated semiconductor industry, which implies pricing power and explains the sector’s attractive operating margins and return on capital. Valuations are reasonable, and we have a constructive view on the semiconductor sector and believe it possesses considerable upside.

We believe the recent market dislocation caused by the COVID-19 crisis has created a historic opportunity to buy U.S. Small Cap Value stocks at attractive valuations. However, “value” is not what it seems when viewed through the oft used metric of “price to book value.” Indeed, to be relevant in the capital marketplace going forward, “value” requires a redefinition utilizing finance terminology and not accounting measures.

The final two months of the U.S. presidential campaign promises a torrent of incendiary rhetoric and plenty of surprises for both voters and investors. Market volatility typically rises ahead of elections and if the race remains close we may see elevated uncertainty well beyond November 3. In our latest Insight piece, we look at the implications for taxes, regulation, health care, global trade, green infrastructure and anti trust issues among others, all dependent on the outcomes of the presidential and congressional contests.

In understanding the performance of any investment strategy, it is important to pay attention to how real economic events drove that performance, rather than fall back on a set of abstract  factor returns as if they were somehow responsible.

There have been two monumental crises in the past two decades, the Global Financial Crisis and the current COVID-19 pandemic. While the COVID-19 crisis is crippling financial markets in a similar fashion, monetary policy in the form of QE will not be the silver bullet we need. The solution to the current crisis will require prudent fiscal policy to see us through.

If there is a “small-cap effect” then why has the Russell 2000 underperformed the Russell 1000 over time?

China’s mercantilist behavior, underscored by its “Made in China 2025 initiative,” is in conflict with U.S. demands for greater IP protection, a level playing field and improved market access. Left unresolved, free trade and globalization will be in retreat, with broad economic implications beginning with manufacturers.

While the e-Commerce index as a whole appears frothy, many companies in the sector do possess sound and promising business models. For investors, the key to success is understanding how these business models should be valued. In this paper we examine the reasons e-Commerce may be a bubble, the reasons it may not and a free cash flow based methodology for valuing e-Commerce companies.

Kevin Hebner, Epoch’s investment strategist, lays out the positive case along with the attendant risks of investing in emerging markets over the coming several years.

In this “Insights” piece we look at President Trump’s trade team and how it is likely to implement the protectionist trade views he has held for years. With China being the number one target of potential trade policy, we explore the views held by the various members of the trade team as they relate to China. The piece also identifies other countries that might likely be affected by U.S. trade policies, the likelihood of a trade war and the impact a trade war could have on the U.S. economy. Finally, we discuss the potential implications on equity markets.

The rise of populist political parties, a lack of progress on key reforms and tight fiscal policies will present challenges for the euro zone and its lackluster economy in 2017. CEO and Co-CIO Bill Priest and Investment Strategist Kevin Hebner discuss these issues and the implications for investors.

In a follow up to a piece that was originally featured in our October 2016 Newsletter, U.S. Small and SMID Cap Portfolio Manager Michael Caputo looks at the performance of smaller U.S. companies since the election of Donald Trump and whether the outlook for them has changed.

On November 8, 2016, the U.S. elected Donald Trump to become the country’s 45th President. The balance of power in Congress remained unchanged with the Republicans retaining a majority in both the House and Senate. In this paper, CEO and Co-CIO Bill Priest and Investment Strategist Kevin Hebner discuss areas of concern for the U.S. economy as well as the positive potential of the election results.

In this paper, CEO and Co-CIO Bill Priest and Investment Strategist Kevin Hebner examine recent trends regarding Japanese corporate governance, buybacks, dividend policies, cash levels, cross-shareholdings and M&A activity to show the impressive changes that are occurring. They discuss whether these changes make Japanese companies more investible through a cash flow prism and identify the most promising sectors for cash-flow focused investors.

On June 23, 2016, the U.K. will vote to either remain in the European Union or leave it. Epoch’s general view is that the U.K. would be better served to remain than to leave it. The short-term implications of a vote to leave include significant market turbulence, a weakening GBP, stalled M&A activity and a general flight to quality within the U.K. and possibly globally, but are difficult to fully quantify.

We expect only modest global GDP growth during 2016 and 2017, coupled with lower-for-longer policy rates. PMIs, which are the best economic indicators for signaling inflections in the cycle, continue to send mixed signals. The outlook for earnings remains challenging and even ex-energy, we expect minimal earnings growth this year. Additionally, equity markets appear to already be fully valued and we see little room for multiple expansion from here. Our cautious perspective is partly due to our view that the global economic outlook is clouded by several secular headwinds.

The U.S. economic recovery appears to be on firmer ground and the Federal Reserve is unlikely to cut interest rates into negative territory during 2016 or even 2017. The Fed is sufficiently worried, however, about anemic global growth and the Unites States’ vulnerability to external shocks that it is updating its giving thought to how it might follow the lead of other central banks and introduce a negative interest rate policy (NIRP). How would U.S. equity markets react if the Fed were to cut rates below zero?

It is expected that the next twenty years will see a dramatic increase in commercial aircraft production, driven by the demand for air travel and the push to replace airplanes with newer, more fuel efficient versions. In our latest Insight, Epoch Co-CIO, David Pearl, and members of our investment team explore these drivers and our approach to finding the cash flow opportunities in the commercial aerospace industry.

Active Share has gained increasing acceptance among consultants and plan sponsors in determining whether investment managers are truly active. In our most recent Insight, we provide our view on how to interpret this statistic.

Epoch’s most recent Insight piece, Utilizing Utilities in Shareholder Yield, discusses how and why companies in the utilities sector have historically played a significant role in the Shareholder Yield strategies.

A quick look at the potential effects of rising interest rates on Epoch’s Shareholder Yield strategies.