• EPS reporting continue to be very strong – more than 60% of the S&P 500 are outperforming earnings expectations
• Despite the perception of EPS growth being driven by cost cutting, S&P 500 sales rebounded strongly in 2010 led by foreign operations, business to business sales, commodity prices, exports and even retail sector sales growth. We expect continued strong sales growth in 2011, when we will see a new sales peak for the index.
• Earnings margins, especially non-financials, have bounced back to pre recession levels. This rapid margin rebound suggests that higher margins today vs. history are structural in nature. The net margins recovery is being helped by lower credit costs.
• Recycling fixed income dollar inflows into stocks – low PEs despite low interest rates make it very attractive for companies to issue bonds to repurchase shares.
Our base case outlook remains that the bullish forces of an improving economy, rising earnings and decent valuations outweigh the bearish forces of potential downside risks over the longer term. Looking ahead, we believe that the global economy should be strong enough to withstand the uncertain pace of the economic recovery in 2011.
As we begin 2011, the case for being bullish on US equities not only remains intact, but has gotten stronger. In 2010, the recovery in S&P 500 EPS outpaced the recovery in stock prices, resulting in valuations that are more attractive now than they were at the start of last year. Also, the risk of a double-dip recession has substantially declined over the course of the year thanks to employment stability and stronger household and bank balance sheets. The earnings outlook is clearer thanks to strong and broad earnings gains in 2010 across industries and geographies. Additionally, the political uncertainty surrounding the mid-term elections is now behind us, as well as a favorable resolution to the question of the tax cut extensions. The market has not given full credit to these events."
David Vanhoe, Fondsmanager "KBC Equity Nasdaq Acc" (07.02.2011): "The world economy as a whole is continuing to recover vigorously. This is expressed, for instance, in the pattern of trade volumes and the growth of industrial production in the fourth quarter of 2010. Movements in commodity prices suggest healthy growth on the part of the world economy.
That growth is, however, occurring at two speeds, with the developing economies clearly growing more rapidly than their developed counterparts. The Asian growth economies in particular are taking the lead among the developing nations. The gap in growth rates between developed and developing economies has led, among other things, to differences in monetary policy. Whereas the central banks in the US and EMU will continue to pursue an (extremely) loose monetary policy for the foreseeable future, those in the developing economies will proceed with their cycle of tightening.
Esp. the Fed is following an extremely loose monetary policy. President Obama reached an agreement with Congress at the end of 2010 regarding an extension of tax cuts that were due to lapse. There was even a further budgetary stimulus in the form of a two-year tax cut for families and the possibility of accelerated depreciation for corporate investment. Extending the existing tax cuts will have a neutral impact on economic growth, but the additional measure will provide a stimulus.The scale of its impact on economic growth will depend on factors such as how much of the temporary tax cuts households will choose to save, making it difficult to quantify. The total budgetary impact is about 1% of GDP in 2011. This also means that the inevitable budget cuts (the budget deficit stood in 2010 at around 10% of GDP) will be put off until 2012 at the earliest and possibly even until after the presidential elections at the end of that year."
e-fundresearch: "Which company specific fundamental factors are you focusing on currently?"
Francois Mouté, Fondsmanager "BNP Paribas L1 Opportunities USA C C" (04.02.2011): "In our analysis of companies to invest in we first of all assure their position in the right sector where real long term growth prospects are present. Within a chosen sector we then select companies upon a series of fundamental and financial parameters whereby the quality of the management is paramount. With quality of management we intend; what is their vision and their ability to effectively execute and implement their views so as to create value for their shareholders."
Mark Stoeckle, Fondsmanager, Eric McLaughlin, Investmentexperte, "BNP Paribas L1 Equity USA Growth C C" (08.02.2011): "In the current market environment, we view stocks that can sustainably deliver earnings growth through sales growth as the best opportunity over the short to intermediate term. While the focus of investors over the past 18 months has been on earnings growth, that has largely come through expense control. We believe we are transitioning to a market where earnings growth driven by top-line (revenue) growth will be paramount."
David Vanhoe, Fondsmanager "KBC Equity Nasdaq Acc" (07.02.2011): "The most important drivers for individual stock perfomance are top line growth and margin expansion. The stocks we favor tend to be growth companies benefiting from strong structural growth drivers."
e-fundresearch: "Which over- and underweight positions are currently implemented in your U.S. equity positions?"
Francois Mouté, Fondsmanager "BNP Paribas L1 Opportunities USA C C" (04.02.2011): "We continue to favour sectors that are well positioned to benefit from real economic growth that comes from the emerging markets. This translates into strong positions in energy and commodity related stocks, especially agricultural commodities. We also favour gold and silver mining stocks. We are underweight in stocks of companies that are dependent on goverment spending such as utilities and health care while due to the precarious situation of banks and insurance companies we avoid this sector alltogether."
Mark Stoeckle, Fondsmanager, Eric McLaughlin, Investmentexperte, "BNP Paribas L1 Equity USA Growth C C" (08.02.2011): "We feel that our team’s strength lies in stock selection, and so our portfolios are designed to take advantage of this strength. We therefore allocate the majority of our risk budget at the stock level. This is primarily accomplished through keeping the portfolio industry and sector group neutral compared to the benchmark, which limits unintended risks."
Felix Wintle, Fondsmanager "Neptune US Opportunities A Acc GBP" (03.02.2011): "Our overweight position in the materials sector, particularly agricultural stocks such as CF Industries and Mosaic, delivered strong returns, driven by the ongoing rise in soft commodity prices. We added further holdings in this sector, including coal producer Massey Energy and copper miner Freeport McMoRan, which are both benefiting from tight supply-demand dynamics in their respective end markets. Towards the end of the quarter we also began to add positions in bank stocks as the sector fundamentals improved and valuations were attractive. We also increased our exposure to the industrials sector, adding a position in the global leading engineering and construction company, Fluor."
David Vanhoe, Fondsmanager "KBC Equity Nasdaq Acc" (07.02.2011): "Compared with the broader US equities market, KBC EF Nasdaq has typically a very strong overweight position in information technology. Energy and financials form the largest underweight positions."
Question 4
e-fundresearch: "Where do you see potential risks for US equities?"
Francois Mouté, Fondsmanager "BNP Paribas L1 Opportunities USA C C" (04.02.2011): "The risks for US equities are very much related to the weak growth propects for the US economy as a whole, in particular for those companies that are dependent on domestic demand. Especially vulnerable are those companies and sectors that are unable to pass on expected costs to their clients thus eroding margins."
Mark Stoeckle, Fondsmanager, Eric McLaughlin, Investmentexperte, "BNP Paribas L1 Equity USA Growth C C" (08.02.2011): "Although we continue to expect to see some hiccups along the way, improving economic growth and corporate earnings point the way toward a continuation of the equity bull market. We are in the midst of the first global economic recovery that is being led by emerging economies, and the United States is only at the beginning of transitioning into a self-sustaining expansion, suggesting that economic improvements still have a way to go.
Probably the most negative story we can come up with for the US economy is the upcoming debate on raising Treasury’s debt ceiling. While the ceiling will inevitably be raised, the debate will highlight the Democrat-Republican split in Congress as well as the unsustainability of current fiscal trends. Meanwhile, 10-year yields have been broken out to the upside and couldn’t manage to collect a “flight to safety” bid during the crisis in Egypt."
Felix Wintle, Fondsmanager "Neptune US Opportunities A Acc GBP" (03.02.2011): "We maintain our positive outlook for the US economy and equity markets in 2011. Government policy remains supportive and economic data continues to show signs of strength. Whilst headwinds remain, including a weak job and housing market, it is clear that US corporates are in rude health and we believe they will continue to experience steady profit growth. Furthermore, companies are currently very well capitalised and will be able to use this balance sheet strength to enhance shareholder value via special dividends and M&A activity."
David Vanhoe, Fondsmanager "KBC Equity Nasdaq Acc" (07.02.2011): "Job creation in the US labour market is disappointing. The current rate of job creation makes a new recession highly unlikely, but jobs need to be created at a rate of at least 200,000 a month to achieve a sustainable economic recovery. Only then will the unemployment rate decline sustainably, boosting growth in pay, disposable income and household spending. Until such time as this level of job creation is achieved, growth in household spending (which accounts for some 70% of US GDP) will ultimately depend on government stimulation measures. US households are, after all, unlikely to lower their savings ratio in the coming quarters, given the need to pay down their financial debts."
e-fundresearch: "Please comment on the performance and risk parameters of your fund in the past year as well as over the past 3 and 5 years."
Francois Mouté, Fondsmanager "BNP Paribas L1 Opportunities USA C C" (04.02.2011): "In the context of volatile markets our fund has been able to provide investors with an above benchmark return as follows:"
Mark Stoeckle, Fondsmanager, Eric McLaughlin, Investmentexperte, "BNP Paribas L1 Equity USA Growth C C" (08.02.2011): "2010 was a difficult period as the market was driven by big picture “macro” forces like the global economy, politics and regulation. As more and more investors made decisions based on macro concerns, stocks became quite correlated. In addition, the dispersion in equity returns shrunk, making it difficult for bottom up stock pickers and for investors who rely on fundamental company research, like us, to outperform. The market’s macro focus means that earnings have not been driving stock prices and this is at the core of our investment philosophy and process.
Against this market background, outperforming has been difficult. The fund started off the year well, but fell behind from April through August. September through the end of the year were very good for our relative results and we ended 2010 slightly behind the benchmark. Strong stock selection in the technology and consumer discretionary sector has been offset by disappointing results among our industrial, health care, financials and natural resource stocks.
Our retail holdings have outperformed this year led by Abercrombie & Fitch, Dollar Tree and Limited Brands. Easy comparisons to 2009 and improving demand for discretionary goods has been driving positive sales growth in our holdings. Our strong relative results in the technology sector were led by our positions in Apple and EMC. Apple has outperformed based on the continued strong results of the iPhone and the better than expected launch of the iPad.
Our energy holdings have been a leading detractor from our relative results. The portfolio was hit by several positions due to their involvement in the Deepwater Horizon incident in the Gulf of Mexico. Transocean is the world´s largest offshore drilling contractor and BP was operating a Transocean rig when the accident occurred. In addition, oil service stock Weatherford International and offshore driller Noble Corp traded lower. In the materials sector, Reliance Steel & Aluminium reported lower than expected earnings in May and the stock continued to trade lower throughout June, making it a top detractor from our relative results.
In the financials sector, we have been disappointed by the performance of our holding in Blackrock Inc. Blackrock’s earnings have disappointed investors as both revenues and earnings have been lower than expected. Growth was still behind consensus as the company continues to struggle integrating their recent acquisition of BGI from Barclays.
The past three years covers two distinct periods; the market melt down and then the following recovery since March 2009. The fund performed very well over the period by remaining consistent and disciplined. We remained focused on stock selection and we focused on lower volatility stocks during the market sell-off that allowed the fund to outperform on the down-side but fully participate in the recovery. The fund earned the greatest contributions to its relative results in the Energy, Technology and Financials sectors. Within financials, the fund was able to avoid the major disasters (Bear Stearns, Fannie Mae, Freddie Mac, AIG, Lehman Brothers) and achieve strong results here.
Over the longer term, our approach to growth investing has been to focus on finding high quality companies that are trading at reasonable valuations. We closely evaluate each company and develop a learned view on their sustainable earnings growth prospects. We construct the fund to be sector neutral and in this way we guarantee that our results will be driven by our stock selection skills. The fund has performed well in up and down markets and we believe this is so because, over the long-term, earnings drive stock prices. Over the past five years, our strong relative results have been driven by stock selection in the Consumer Discretionary, Technology and Energy sectors."
Felix Wintle, Fondsmanager "Neptune US Opportunities A Acc GBP" (03.02.2011): "The Neptune US Opportunities Fund achieved a strong finish to 2010 with a return of 13.49% during the final quarter, outperforming both the S&P 500 Index rise of 11.47% and the IMA North America sector average of 13.30%."
David Vanhoe, Fondsmanager "KBC Equity Nasdaq Acc" (07.02.2011): "Maybe a little bit surprising, but during the last bear market (end 2007-2008-early 2009) the fund stayed more or less in line with the broader US market. KBC EF Nasdaq typically outperforms the broader US market during bull markets. The bull run since March 2009 illustrates this. It is clear that the strong information technology exposure drives the performance of the fund."
All data per 28.1.2011:
