Investing in the US Part 2

Elisa Trovato: Stefano, what are the key Investment themes to look at today?

Stefano Spurio: One important theme we are looking at is finding a mix of companies trading at attractive or acceptable valuations that are leaders in their sector and able to pass on commodity-price increases to end-users. The luxury sector is a good example, because it is able to keep its high margins and at the same time is extremely attuned to the needs and wants of important clients like high/ultra-net-worth individuals in Asia and other emerging markets. These are companies and brands that are sought after by these consumers, and we take this into consideration in our valuation mechanism.

The discussion about a potential reindustrialisation of the US is valid for Europe too. All these companies could benefit in the future from innovation and maintain their leading role in certain fields – be it automation or data-management, such as Visa and MasterCard. Another theme is what we call the quaternary sector. This is linked to countries that are good at spending a lot of money in education to feed companies a highly skilled labour force, which will probably enable firms based in developed countries to counterbalance the growth areas of China, Brazil, etc that are much more labour intensive.

Recently, we have seen wage inflation combined to currency devaluation which makes these markets less attractive. There are opportunities in developed countries, especially in the US, in companies where we can identify some products or services that will be really important in the future for people in developed and emerging market economies.

Lance Peltz: The theme that we have not yet seen, and maybe goes back to our opening comments about confidence, is that there has not been that much M&A activity in the US. Given the scale of cash on balance sheets, given the margins and corporates’ desire to protect those margins, I would not be surprised to see more consolidation next year. 

Claudia Panseri: What would be the effects on your fund selection? 

Lance Peltz: That is a good question because most managers would say, ‘We are fundamental investors and we do not play M&A’. There are very few managers that strike me as a good way of getting exposure to that. It should lift the market. I cannot decide whether it is going to be more of a mid‑cap or large cap effect. 

Oliver Gregson: I would not say that that is a way of expressing it for long‑only, but for an event‑driven US hedge fund, absolutely. Event‑driven as a strategy is increasingly becoming quite interesting.  There are a lot of opportunities for corporate events – M&A has not been one, but restructurings, divestitures, etc. have been a story.

Grant Bughman: Important for that is that betting on that alone is probably a losing proposition because it seems every year that people are calling for a new wave of M&A activity to take hold, and we have been disappointed. That was your assumption, really, since the bottom of the crisis. What we are trying to do is invest in companies that on their own are very high quality business models that are cheap and may have some optionality to be taken out down the line.

We look for dominant business models that are sustainable and that are attractively priced. One of the things that we have tried to do in the last 18 months is have a balance of businesses that generate increasing revenues overseas.

That helps from our perspective to insulate earnings from an FX perspective, but also the price action for those shares because the prices for companies that are exposed to China are going to reflect the perception of whether China is going to have a soft landing, hard landing or somewhere in between.

Long term, I think we can all agree that the Chinese market is going to be domestic‑demand driven market. That is where the growth is going to come from. 

For example, one of the companies that we own is priceline.com. Priceline is close to Europe and clients would say, ‘Why would you want to own a company close to Europe?’  They are in the travel business and their website booking.com is dominant in this space and allows people around the continent to book holidays all around Europe. There is very little competition; their growth rates are accelerating, even in spite of the recessionary environment in Europe. We want own them alongside a company like CVS Caremark, which is a pharmacy retailing chain in the US.

Elisa Trovato: In the US, are there any sectors that would do well out of a particular presidential election result in the US?

Stefano Spurio: It is not really about the party that wins. If the incumbent is elected, usually the equity market moves up 10 per cent; if the challenger is elected, it goes down, on average, by 4 per cent. However, here the question is all about confidence. If the winning party provides enough confidence to the marketplace, then it will help to finally get out of this prolonged crisis.