Luc Bauler, Fund Manager at BLI - Banque de Luxembourg Investments, considers that the American market is still attractive for investments as long as they focus on companies with strong competitive advantages.
What are the key principles underpinning your management process?
We manage our funds according to the principles of Business-Like Investing. This stock-picking approach means that every investment is considered as taking a stake in a company, with a long-term investment horizon. We focus on high-quality companies which have a clear competitive advantage that enables them to generate a high return on capital invested and strong free cash flow. Over the long term, this kind of company is expected to create value for its shareholders.
Stock-picking and investment decisions start from a detailed fundamental analysis of each company’s activities. Drawing on Business-Like Investing principles, this in-depth analysis leads us to a close study of each company’s business model and industry positioning, its capacity for free cash flow generation, and its capital-allocation process. Then, before investing, the company's valuation must be attractive and its share price offer a safety margin against the fair value of the business.
How would you sum up the year 2018 in the United States?
After 2017, a year marked by historically low levels of volatility, the equity markets saw a return to volatility in 2018, especially in the last quarter. At the beginning of the year, the US equity markets were still buoyant, benefiting from US companies’ strong earnings growth, helped in part by Donald Trump's tax reform. By the end of the year, slowing economic growth around the world, rising interest rates in the United States, and the US-China trade war weighed on the financial markets. The US large cap equity index, the S&P 500, fell at an annualised rate of 14% (in USD), with a 9.2% slump in December alone, the worst monthly performance for a December since 1931.
On the positive side, following the market correction in the fourth quarter of 2018 and given the sharp increase in US corporate earnings, the valuation of the US market is now back in line with its historic average for recent years. With corporate earnings having increased by an average of nearly 20% in 2018, and a market in retreat, valuation multiples were revised downwards by around 25%, which represents a historically significant adjustment. In the current economic environment, which is showing some signs of slowing but is not about to go into recession, the outlook for the US equity market remains positive.