FFM Fund Newsletter - May 2025

May 2025

Dear Friends, Dear Investors,

“Here’s the interesting thing about the stock market: it cannot be indicted, arrested or deported; it cannot be intimidated, threatened or bullied; it has no gender, ethnicity or religion; it cannot be fired, furloughed or defunded; it cannot be primaried before the next midterm elections; and it cannot be seized, nationalized or invaded. It’s the ultimate voting machine, reflecting prospects for earnings growth, stability, liquidity, inflation, taxation and predictable rule of law.” Michael Cembalest, in JP Morgan’s Eye on The Market (March 12, 2025)

The beginning of the year has been, to say the least, turbulent. There is little need, at this point, to revisit in detail the tariff saga we have already communicated extensively about. Today, we prefer to focus on two essential questions: first, at what level tariffs might stabilize; and second, their potentially lasting impact on the stock market.

Regarding the first point, it remains difficult to say whether the United States will ultimately enter a recession due to tariffs, which are now partially suspended. What is beyond doubt, however, is that uncertainty remains very high. The moratorium is only valid for 90 days, and the trade conflict with China is far from resolved.

American companies, and European ones, for that matter, have suspended all their investment plans, and the slightly more favorable developments over the past forty days have done nothing to change that. While some political reversals may seem reassuring, they mostly highlight a worrying reality: the President of the United States can reverse his decisions at any moment, with no clear direction or identifiable long-term strategy for investors, guided mainly by political survival instincts.

Our working assumption remains that, faced with market reactions, Trump will choose to extend this “pause” several times, thereby effectively establishing the universal 10% tariff he advocated during his campaign. In return, other countries will likely concede a few marginal adjustments to their own tariff and trade policies. As for U.S.–China relations, it seems unlikely that either side will yield in the short term. Negotiations have indeed taken place in Geneva, but a complete dismantling of the tariffs imposed since the inauguration seems highly improbable. The analyst consensus points to a stabilization of the tariff rate applied to China around 60%.

A rough estimate suggests that the overall effective U.S. tariff rate could increase by approximately 16%, combining a universal 10% tariff, a 60% rate on Chinese products, and specific 25% duties on certain sectors. This means that, even taking into account the deflationary impact of falling oil prices, U.S. inflation could peak around 4%. Under this scenario, U.S. GDP growth should fluctuate between 0.5% and 1.5% annually over the next four quarters.

As for the second point, which arguably carries the most significant long-term consequences, the structural damage is done. The trust of the United States’ trade partners has been severely eroded. Even if the Republicans lose power, the potential return of a Trump-style policy will continue to haunt business leaders and foreign investors.

Despite these concerns, we have already seen similar institutional drifts on a larger scale elsewhere (in Argentina, Turkey, or Hungary, for instance), and the erosion of the rule of law does not happen overnight. This, in our view, does not justify a hasty exit from the U.S. market, even though the country’s chaotic political landscape may cause stock market swings and volatility spikes more typical of emerging markets. During Trump’s previous term, after some turbulent episodes, the stock market eventually became the main compass of U.S. policy again. Moreover, some of the world’s best companies are based in the United States, and it would be difficult, if not impossible, to find their equivalents elsewhere.

In general, our portfolios show a balanced allocation between the euro and dollar zones, with exposure close to 50% in each. Our investment philosophy does not rely on a pre-established geographic allocation, but rather on a rigorous selection of high-quality companies that meet fundamental criteria. These companies are primarily located in Europe and the United States. A regional overweight would make little sense, especially since most of the companies in our portfolio are globally exposed.

Nevertheless, we are observing some shifts in paradigm: the “Magnificent Seven” may no longer be the sole growth engines. Other companies, particularly American ones, continue to show strong growth, between 10% and 15% per year, and this dynamic is still reflected in their long-term stock valuations. We remain attentive, selective, but fully invested during this transition phase.

Best regards,

Your CaridaB Group Team