Equity markets in the developed world have appreciated significantly over the past five years, with today's valuations surpassing their long-term historical averages on a normalised earnings basis. While this makes it more challenging to find stocks trading at a significant discount to intrinsic value, Orbis continues to identify pockets of value in a range of countries and sectors.

One area where Orbis is finding value is in larger, high-quality Western companies. From extremely high valuations at the height of the tech bubble, these names have broadly underperformed small- to mid-cap companies since 2000. Orbis' favoured large-cap names include eBay, Microsoft, Motorola and SAP. These are very different businesses with different fundamentals, but they share at least two traits in common: large market capitalisations and attractive valuations.

Orbis is also finding some decent companies trading at very low prices. Of course, with low-priced stocks, judging whether they are a bargain or a value trap is critical. An example here is Gazprom, whose shares have tumbled amidst negative sentiment on Russia. While Orbis agrees the stock has above-average political risks, these look to be more than reflected in its share price. At 1.6x operating cash flows, it is one of the most attractively priced energy companies globally and even after deducting capital expenditures, it is generating significant excess cash flow. The key question is what it will do with this cash, and contrary to popular perception, Orbis research suggests that it will not be squandered.

Orbis has also found opportunities to buy or build positions in familiar names that trade at attractive valuations following recent underperformance. One example is the Orbis Funds' longstanding investment in Samsung. Its valuation currently stands at close to a 10-year low, driven by fears of declining market share and profitability in the company's smartphone business. It trades at eight times Orbis' estimates of 2014 earnings, or six times excluding the cash on its balance sheet. At this valuation, the market appears to be pricing in a structural decline in earnings. In Orbis' view, this is highly unlikely, and ignores the potential for Samsung's market-leading memory chip business to drive earnings growth. Should Orbis' thesis prove correct, Samsung's shares should trade closer to 10 to 11 times earnings. Orbis also sees additional upside in the form of a potential restructuring, which could allow Samsung to return more capital to shareholders. With US$45bn or 27% of its market value in cash, any improvement in Samsung's capital allocation could prove very rewarding.

At Orbis and Allan Gray, we look to allocate capital to the ideas that are trading at the most attractive valuations relative to their intrinsic value. The risk we worry about the most is the risk of a permanent loss of capital.

While the opportunity set evolves along with market fluctuations and cycles - the approach remains the same. This discipline is key to delivering outperformance for our mutual clients over the long term.

Commentary contributed by Tamryn Lamb

Whatever it is that has been driving the US stock market to a series of record highs in the first half of 2014, we can be sure of one thing - it's not the economy!

Thus, on the very day in May that the US reported that first quarter GDP had shrunk at an annualised rate of 1%, the S&P 500 notched up yet another all-time high, only to close higher still a month later when that figure was revised down to -2.9%. This may seem counterintuitive, but statistically it's far from unusual: history strongly suggests that there has been very little correlation between economic growth and stock market performance. Even as economic decline was greeted as good news for the US stock market, no such leniency was granted to investors in Russia, Brazil, Korea or China - where economic growth has been no more discouraging. If the prevailing wisdom is to sell the latter in favour of the former, the Orbis Global Equity Fund's current geographic positioning reveals that Orbis respectfully begs to differ.

One may debate at length the root causes of the recent divergence in stock market performance; many theories abound. But Orbis' mission is not to explain stock market movements, nor to predict them, but merely to respond to them, positioning clients' capital to capture the best risk-adjusted investment returns available from the set of opportunities the market presents. This is why Orbis analysts spend the vast majority of their time focusing on the gap between a stock's price and its fair value. When it comes to future returns, what matters is not the latest GDP data, or other such noise, but valuations.

An objective assessment of historical data can be of some help in this regard. One calculation Orbis performs is called re-rated total rate of return (RTRR), which can be thought of as the future annualised return that one might expect if a company's future earnings power resembles its past. Of course, this is a big 'if', but it is one way to estimate the stock's prospective return. Aggregating those prospective returns across many different companies allows us to track and compare the opportunity set, sometimes helping us to identify pockets of value in certain areas of the market. What does this analysis tell us today? All else being equal, China, Korea, Brazil, and Russia appear priced to deliver higher returns than the broader market.

Indeed, Orbis Global's exposure to regions outside North America, Japan, and Europe (excluding Russia) has risen from 21% a year ago to about 35% at the end of June 2014. Given the geopolitical events of recent months, this may appear foolhardy. Orbis recognises that opportunities in less-developed jurisdictions often come with a higher probability of negative surprises, and accordingly require a greater margin of safety. But in Orbis and Allan Gray's view, the risk of losing money comes not from economic uncertainty or nervy sentiment, but from overpaying for investments - in that regard, the less you pay, the lower the risk.

After a strong performance last year, global stock markets are off to a mixed start in 2014. While the FTSE World Index is essentially flat since the beginning of the year, this masks signi!cant volatility in emerging markets and Japan. With valuations in many developed markets arguably looking stretched, it may seem a challenging environment for stock pickers. While there is always a risk that markets could become more volatile, Orbis continues to !nd opportunities that appear able to deliver above-average returns with no greater risk of loss.

Orbis often uses the principle of 'mean reversion' to identify opportunities where the stock market is overly pessimistic about short-term developments. This is particularly useful when looking at companies in cyclical industries, where the future is likely to resemble the past and where many concerns can be resolved in the fullness of time. In other cases, opportunities arise when a company's future is likely to be different to its past and this is not reflected in its valuation.

As an illustration, the Orbis Global Equity Fund owns media shares - including Charter Communications and Liberty Global - which offer many of the characteristics that Orbis !nds attractive. In particular, cable companies stand out as owners of high-quality assets. In many markets, they have a monopoly in high-speed broadband, which is increasingly a 'must have' service. As such, cable operators have been able to continually gain market share at the expense of traditional telecom service providers, which suffer from inferior technology (DSL) or higher costs (!bre). With cable broadband penetration in the US and Europe still only in the 30-40% range of potential customers, Orbis believes cable has considerable room for future growth.

Many investors disagree. Cable bears often point to the trend of 'cord cutting', in which customers cancel cable subscriptions in favour of online services like Netflix. Orbis believes this concern is overblown. First, although Netflix has more than 30 million subscribers in the US - and many more sharing those subscribers' passwords - video subscriber losses at US cable companies have been relatively limited, supporting the view that online services are complementing, rather than replacing, cable. Second, Orbis believes traditional cable continues to offer tremendous value to most consumers: for about US$80 per month, consumers can access a full spectrum of entertainment. Finally, cable operators have 'blue sky' opportunities to offset subscriber losses by offering new services such as home monitoring - which allows for remote control of climate, lighting and security systems - as well as additional services for business customers.

Despite attractive fundamentals and resilient businesses, Global's cable holdings trade at depressed valuations based on their normalised cash flow generation. Both Liberty Global and Charter Communications offer free cash flow yields above 10%. As this capital is available for value-creating M&A and for distribution to shareholders, long-term investors may see solid returns even if cable bears never become bulls.

Since early 2009, global stock markets have more than doubled, and 2013 was another robust year. Valuation multiples now sit solidly above those seen in 2009, but below the highs of the mid-to-late 1990s. Similarly, corporate returns on equity are now solidly above the lows witnessed in the last few US and worldwide recessions, but below the inflated levels seen in the mid-to-late 2000s. On this basis, one could hardly argue that overall global equity markets are wildly cheap at this point, but there is also a case to be made that they are not wildly expensive either.

Of course, what matters for the Global Equity Fund is not the aggregate valuation of the stock market as a whole, but the stock selection opportunities within it. There is no doubt that many areas of the market currently look expensive and, as a result, will struggle to deliver satisfactory real returns over the medium term. However, while undervalued companies are less plentiful than they were a few years ago, Orbis has still been able to find pockets of value that they believe offer potential for reasonable riskadjusted returns. Examples of such pockets include selected opportunities within Asia, particularly Korea, and stocks within the oil & gas sector, such as Apache.

One part of the market where Orbis continues to see little value is in 'bondlike' equities with highly predictable earnings and dividend streams. Since the financial crisis, these shares have become inflated as a result of strong investor appetite for perceived stability and yield. As a result, many stocks Orbis has uncovered have almost the opposite characteristics - a high degree of economic sensitivity and, in many cases, exposure to rising bond yields.

Examples of such companies include insurers such as AIG and Aegon and managed healthcare companies such as WellPoint and Humana, which should all see the income on their investment books rise. Another example would be companies with large underfunded pension schemes, such as General Motors, which benefit from a higher discount rate applied to their pension liabilities.

Only time will tell how global stock markets and the Fund's holdings will fare in the years ahead. Every investment environment has a set of risks, and this one is no different. The list today is long and well documented: high levels of sovereign debt, the unintended consequences of unconventional stimulus policies and so forth. None of these should be taken lightly, but as is often the case it is the unseen risks that are most likely to have the greatest impact on markets. While everyone is on the lookout for the next 2008, the next shock may very well develop in an area where few are looking.

The broad rise in prices over the last five years has reduced the equity risk premium - the compensation that equity investors should expect in return for assuming these risks. Critically, our process ensures that we are continually focused on avoiding the single most important risk investors face in any environment: the risk of paying more for an asset than it is worth.