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FFM Fund Newsletter - Aug 2021

August 2021

Markets continued their rally in August (S&P 500 +1.28%, Nasdaq 100 +1.61%, Euro Stoxx 50 +2.50%, CAC 40 +1.05%) while interest rates seem to be stabilizing at relatively low levels after an extremely volatile first half of the year.

The Chinese government, meanwhile, continues to take steps to further assert its control over the economy. These decisions have, this time, ended up with an impact on some of the occidental companies held in our portfolios, particularly in the luxury sector. Indeed, Chinese President Xi Jinping’s inclination to limit "unreasonable income" and the possible pressure to up wages in favour of the middle class, as reported in the minutes of a meeting of the Chinese Communist Party’s Central Committee for Financial and Economic Affairs held during the month, had investors somewhat worried.

Markets immediately interpreted this as a possible announcement of tax hikes for the wealthy and possibly a discouragement to display wealth. In any case, and regardless of the measures finally applied, some stocks have seen their prices correct sharply in anticipation of those measures: LVMH fell by -8.63% during the month, Hermes by -3.45% and Richemont, the Swiss owner of Cartier among others, by -12.93%.

In our opinion, this does not jeopardise the attractiveness of the luxury sector in the medium and long term and we have taken advantage of these corrections to reposition ourselves in certain stocks. The situation seems to us to be diametrically opposed to the Chinese companies mentioned last month, in which it does not seem wise to invest.

On the other hand, this episode is a perfect illustration of modern finance, where algorithms (and sometimes humans) read and analyze every announcement and react nervously, whilst being ruthlessly uncompromising and, admittedly, sometimes without any long-term consideration. Besides, it is also interesting to note that the volume of shares traded over these few days has been much higher than average, a sign of panic, which given current conditions, is purely speculative since there have been no real announcements.

The only positive effect is that it rids companies’ shareholdings of the weak hands who have no conviction in their investments and presents some investment opportunities to us.

Over the past few weeks, our customers have been persistently asking the following: “Given the excellent performance since the beginning of the year, wouldn't it be worth taking some profits on a few investments, stay in cash and wait for a correction?’’

This is a perfectly legitimate question to which we cannot give a definitive answer. The complexity of the financial markets, like that of the rest of the world, makes any prediction virtually impossible. For example, who could have predicted in March 2020, at the worst of the first wave of the pandemic, that we would end up having a great year in 2020? Especially, after an exceptional year in 2019!

The same applies today, even if it may seem logical to take profits after a notable rise. Besides, many were already asking us about taking profits at the end of 2019 and 2020.

The key question for us is whether this increase is exaggerated or simply a reflection of the economic performance of the companies held in our portfolio. In most cases, the market value of a stock is correlated with its underlying economic performance.

Sometimes, of course, it is slightly higher, but there is nothing to indicate a strong exaggeration, or even a bubble, at least in the stocks we select. In this context, and considering the opportunity cost of cash compared to holding a good quality company that generates 12 to 18% growth per year, the choice seems clear.

Following an excellent month of July, August was more of a consolidating month for our funds: FFM European Selection posted +1.98% and FFM American Growth -0.03%.


Fisconsult Fund Management

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