Since the current environment of low growth and cheap debt is conducive to M&A, many of the deals which have been concluded recently are questionable from a capital allocation point of view, De Fonclare believes.
“In the past there have been a lot of examples of companies doing M&A and destroying value. What we’ve seen recently, is that not only the prey has been going up but also the company that was doing the acquisition. This means investors had already accepted the synergies scenarios put forward by that company,” he says.
De Fonclare is also wary of defensive stocks, which were among the best performers in 2015. “Investors have crowded into those trades and that leads to high valuations. You can do better than buying Nestlé which trades on a forward P/E of 20,” he says.
So is there anything the Frenchman actually likes at the moment? “I’m looking for companies that show some signs of pricing power,” he says, adding he finds such a trait particularly important in a deflationary environment, because it enables companies to keep the benefit of lower material costs for themselves, rather than having to pass it on to the consumer.