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The Search for Sustainable Growth
After global growth gained momentum through 2016 and 2017, the investment outlook turned cloudier in 2018. Concerns about decelerating economic and earnings growth due to normalizing monetary policies, softening global growth and US-China trade tensions drove a sharp increase in equity market volatility, leading to the MSCI All Country World Index’s worst calendar year since 2008. No regions were unscathed: Europe, Japan and emerging markets were each down double-digit percentages, while the US market fell 5% for the year.
In contrast to the rest of the world, the US economy strengthened in 2018. The substantial fiscal stimulus in the form of tax cuts contributed to stronger economic growth and corporate profits. Yet, with tax reform in the rearview mirror, growth rates are inclined to come down in our estimation as comparisons become more difficult in upcoming quarters. In addition, margins are at risk as the costs of raw materials, labor and interest are increasing.
As part of our search for sustainable growth, we pursue companies possessing particular attributes, including industry leadership, offering of an essential product or service, provision of a differentiated solution or ownership of unique assets. We believe high-quality companies with one or more of these attributes can enjoy sustainable competitive advantages, positioning them well to generate long-term earnings growth.
One area which we find fruitful for investment candidates is oligopolistic markets. We find that consolidated or consolidating industries typically offer greater economies of scale, stronger pricing power, higher margins, better asset efficiency and above-average returns. Industry leaders can be defined in several ways. For example, a company can be recognized as an industry leader because it is considered the most effective in its industry, has the highest market share, sells more products, makes more profit or has a better known brand than its competitors. In our view, being a leader within a consolidated industry is considerably preferable, as the leadership advantages can be diluted in a fragmented industry.
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