Dear Investors, Dear Friends,
March proved as eventful a month as January and February, with equity, bond and commodity markets all experiencing wild swings down as well as up. For instance, the Euro Stoxx 50 Index was down early in the month as much as 10% before finishing almost flat. The Brent Oil May 2022 Future contract (which is the reference for North Sea oil) was up as much as 30% during the month before losing -20%. Finally, the on-the-run US 10-Year Treasury Bond did offer some protection early on but finished the month down almost -5%, which is a massive move for a government bond. For reference, the S&P 500 ended the month up +3.58%, the Nasdaq 100 up +4.22%, the Euro Stoxx 50 down -0.55% and the CAC 40 flat at +0.02%.
The crosscurrents currently happening in the markets are truly massive and, while markets by their very nature are always unpredictable, to try to make forecasts for the rest of the year seems be even more of a fool’s errand than usual. Some observers are calling for a massive rise in inflation and this seems to make sense, as all commodities have surged, be they energy-related commodities (oil, gasoline, heating oil, natural gas), soft commodities (wheat, corn or soybeans) or even metals (aluminum, iron ore, steel, nickel). After having done nothing since the last commodity bubble that ended in 2008, this theme has found new legs and many investors are talking about far-away tin mines with as much excitement as was once reserved to technology stocks such as Zoom Communications or DocuSign, or even cryptocurrencies, during the 2020 pandemic. Such is the way of markets, to always look for the next easy way to make a lot of money quickly (spoiler alert: it rarely works).
However, one could also make a pretty strong case that the current high inflation (and there can be no denying that it is high, it is the highest since the 1970’s) is but a precursor to a new bout of deflation. After all, for inflation to persist, commodity prices (among other things) must not only stay high but keep on going higher. This may seem counterintuitive, but if all commodity prices stay at exactly the same level for the next twelve months (and these are very high levels), inflation in March 2023 on a year-on-year basis will be zero. Furthermore, one could argue the oil prices are currently doing the job of central banks by indirectly tightening interest rates in the sense that the world economy should decelerate somewhat just because of these high prices, thus allowing central banks to tighten less than if the economy was running red-hot. Add to this that almost all fiscal programs around the world designed to help citizens get through the pandemic without too much economic harm are all coming to an end plus the rapid Chinese slowdown (the Chinese real estate market: still imploding) and you can see why a case could be made that inflation will indeed prove transitory and that we could find ourselves in March 2023 talking about deflation again.
While these two views may seem somewhat extreme, and the medium-term reality is likely to lie somewhere between the two (i.e. neither hyperinflation nor deflation), we would rather opt for the second theory. However, we cannot afford to invest our clients’ money based on some gut feeling. That is why the companies we invest in should be good investments in inflationary environments as well. That means they should have pricing power (LVMH already naturally increases its prices each year to levels close to hyperinflation), high margins, and offer a product and/or service that can be replaced only with the greatest difficulty.
It is interesting to note that, as we had warned in our Q4 2021 commentary, while we are currently experiencing a period of underperformance vis-à-vis the indices we track, most of the underperformance since the beginning of the year has occurred until February 24, that is the beginning of the Russian invasion of Ukraine. Paradoxically, the uncertainty of a possible war will have been more harmful for the markets and our portfolios than the war itself. And this is a perfect example of what we mean by “markets are complex dynamic systems that are unpredictable”. Markets will confuse you, make you stress and make you question your beliefs and your strategy. However, they always end up reflecting the value creation of resilient and long-term strategies. Our job is above all to help you in implementing and keeping up with this second option.
Most of you have been reading our newsletters and seen our presentations for some time and you are, by now, aware of our approach to investing, that is, to only invest in quality companies that are able to deliver, over the long-term, high-quality growth in cash flows combined to a capacity to reinvest, at a high return, in their own activities. Most of the time, these companies trade at a slight premium to the market, given their characteristics and, over the medium to long-term, deliver higher returns than the average listed company.
The key word here is “long-term” and we have seen, over the past three months (or rather, the first ten weeks of the year, since a rebound has taken place since mid-February), that pretty much anything can happen over the short-term. For a while, only bank stocks seemed to work. Then, the yield curve, instead of steepening, flattened and bank stocks took a nosedive. This problem was compounded in Europe by exposure to Eastern Europe and Russia in particular and some banks lost as much as 50% of their value in about two weeks (Société Générale, for example). This goes to show that, in order to invest in banks (which we do extremely rarely), you need a lot of things to go right to make a little money but you don’t need much to go wrong to lose a lot.
Let’s also underline the fact that both our funds, although they invest in different geographies (one in Europe, on in North America), have behaved very similarly since the beginning of the year and are down by almost the same percentage. This may seem surprising, in particular since the relevant indices have behaved quite differently, the American ones being down much less than the European ones (with the exception of the Nasdaq 100, which is down more than its US peers). But this observation is a reflection of the homogeneity of our investment strategy: the European and American stocks that we target have the same characteristics, often decorrelated with the markets, and therefore behave in a relatively similar way.
Speaking of which, and as mentioned before, March was kinder to our strategies despite the difficult environment and we managed to make up some of the lost ground.
Indeed, FFM European Selection Fund was up for the relevant period by +6.08% vs +1.91% for the Euro Stoxx 50, +3.85% for the Stoxx Europe 600 and +2.13% for the CAC 40. Year-to-date, the fund is down -13.42% vs -9.21% for the Euro Stoxx 50, -6.55% for the Stoxx Europe 600 and -6.89% for the CAC 40.
As for FFM American Growth Fund, it was up for the relevant period by +6.91% vs +3.28% for the S&P 500, +4.32% for the Nasdaq 100 and +2.53% for the Dow Jones Industrials. Year-to-date, the fund is down -12.32% vs -3.69% for the S&P 500, -8.26% for the Nasdaq 100 and -3.21% for the Dow Jones Industrials.
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