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FFM Fund Newsletter - Jul 2021

July 2021

As is often the case during summer, the main stock markets remained rather calm, apart from a slight and brief correction at the start of the month (S&P 500 +2.30%, Nasdaq 100 +3.35%, Euro Stoxx 50 +0.12%, CAC 40 +0.91%).

As in June, interest rates continued to fall, both in Europe (where the French 10-year rate has moved back into negative territory) and in the US (where the 10-year rate is now trading below 1. 20%).

Once again, we will not comment on inflation. On the other hand, one event in July, which has gone somewhat unnoticed, seems quite relevant in a particular investment context and is worth analysing.

The Chinese government's willingness to take back the reins of its economy, to the detriment of certain national leaders, particularly in the technology sector, has had a real impact on a number of companies favoured by many investors. More than a communist regime, the Beijing regime is above all nationalistic. It will not allow entrepreneurs to become too powerful or to be at liberty to criticise the Party. The various Chinese social networking applications (since Western ones are banned) are not there to generate money for the companies that control them (Tencent in particular), but above all, to control the population and ensure the purging of players who could question the legitimacy of the government.

We have often faced questions, from our clients and in our presentations, about our lack of exposure to the Chinese markets. For sure, the possible benefits to be derived from a market of 1.5 billion consumers may seem tempting, so why don’t we invest in it?

First of all, we are already indirectly invested there, via L'Oréal, LVMH, Novo Nordisk, Ferrari, Analog Devices and Estée Lauder. We don't need to invest in Chinese companies to benefit from the growth of this market.

Secondly, whilst we acknowledge that no legal regime is perfect and that accounting subterfuges are quite possible in the US market (for example), the legal protection of a foreign investor in a Chinese company seems to be quite inadequate.

Finally, the concept of a national champion appears to be more interesting in theory than in practice. Indeed, a national champion, if faced with less competition (and is this really a good thing?), is totally at the mercy of its protector, in this case the Chinese government.

If the government decides that a certain product is corrupting young people, such as the video games offered by Tencent for example, the concerned company will face immediate consequences.

The latest wave of Chinese government decisions has led to a dramatic correction in leading stocks. Tencent, for example, has lost more than 40% of its value since its February 2021 peak, as has Alibaba, down 35% since its October 2020 peak.

And that's for the most popular companies. For private education companies, such as New Oriental Education, the impact has been much more violent (-88% since the start of the year).

The government has decided overnight to regain control over the education of its population calling upon these companies to transform themselves into non-profit organisations. These events, we have reaffirmed our decision not to invest in Chinese companies.

The positive trend in our investments, already observed in June, continued in July with excellent performances resulting in both our funds outperforming the indices: FFM European Selection posted +8.06% and FFM American Growth +3.97% for the month.


Fisconsult Fund Management

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