October, supposedly a dangerous month for equity markets (see October 1929, October 1987 and October 2008), turned out to be a very good month in 2021 (S&P 500 +6.79%, Nasdaq 100 +7.44%, +5.15% et le CAC 40 +4.80%.), more than making up for the losses incurred in September.
What triggered the turnaround is anybody’s guess but what was clear in September was that investors’ sentiment had turned very negative very fast, which usually is a powerful mélange for strong rebounds and this time proved to be no different.
What is certain is that the underlying issues that impacted the markets negatively have not suddenly vanished in the past 30 days. Supply chain issues are here to stay for some time, inflation angst is still very real among investors and China has not magically solved its real estate issues.
But, as they say, what doesn’t kill you makes you stronger and, as long as the issues do not worsen, the markets always adapt and digest the bad news. This is a very important point that many investors have a hard time to grasp: for a real crisis, a real correction to develop, you need not only bad news but worsening news. And it is not the case today.
What worries us the least, among these issues, is the endless worries about inflation. Yes, quite a few companies have had to increase prices recently because they have to pass on increases in shipping and/or raw material costs. Maybe it is it the end of the Just-In-Time model. And yes, long-term interest rates have clearly risen. But it would not surprise us at all if, at the same time next year, talks of deflation will be all the rage.
In a modern, capitalistic economy, it is not central banks that actually create money, but rather commercial banks, via increased loans to their customers. Since 2008, commercial banks have been exceptionally stringent in their lending and, until that changes, paint us unimpressed by any talk of persistent inflation. Let us change our minds a little. We would like to take the opportunity of this Newsletter to talk about American giants compared to our European companies.
It is often argued that Europe is lagging badly behind the US in terms of entrepreneurship, innovation and all-around inventiveness. In order to prove this point, the evolution of European stock indices is often compared to the one of the US indices. And it’s true, both S&P 500 and NASDAQ 100 have long overtaken their former 2000 and 2007 highs while European indices have barely gone back to these former highs (as the CAC 40 just did) or are still well below them (as in the case of the Euro Stoxx 50).
It is also true that Europe has no answer to the success of Amazon, Facebook, Google, or even Tesla (which is a trillion dollar company). But it pays to dig a little deeper to see that this opinion of a Europe that can’t innovate and the stock indices verdict are both quite misleading. After all, try to find a true luxury brand from the US. Or an industrial behemoth (no, GE doesn’t count and it is more of an indictment of US crony capitalism than a success story). Europe is actually full of really innovative companies, they are just smaller (from a market capitalization perspective) than their US counterparts. Even in the tech sectors, ASML, Dassault Systèmes or Soitec, to take only three examples, are all leaders in their respective activities.
A big difference as well is that, in the US, low margin businesses such as automobiles, airlines or banks have already been massively consolidated. There are four carmakers (counting Tesla and Chrysler, which belongs to a European carmaker), three big airlines and four big banks. In Europe, and that has clearly been a problem that can be ascribed to politicians, the wrong-headed policy of fostering national champions has impeded consolidation in these sectors.
This has, in turn, clearly had a negative impact on the evolution of European stock indices. But, and that is vital to understand, one can find just as many great companies on this side of the pond as on the other side. We Europeans sometimes suffer from an inferiority complex but our listed companies (at least the ones we invest in) are clearly telling us that should not be the case.
Considering American giants, some seem to be very interesting as well. During our discussions and meetings with clients and prospects, the most controversial company mentioned is always Facebook. The company actually announced a name change in October and is now officially known as Meta Platforms. Founder and controlling shareholder Mark Zuckerberg has decided to make a very big push to become the clear leader in the Metaverse (hence the Meta name). What is the Metaverse, actually ?
The truth is, no one really knows, but it could be an alternative universe where many humans end up spending as much time as in the real universe. To some, it sounds like a terrible dystopia, to others it sounds like something straight out of science-fiction books and movies and it can’t get here soon enough. For a good idea of what it could look like, a great movie to watch is Steven Spielberg’s Ready Player One, based on the book of the same name by Ernest Cline (a great read as well).
While it is easy to always view the future negatively, the Metaverse could prove a magnificent opportunity for people that do not have access to the same opportunities we do in the real world to have at least a somewhat easier access in a virtual world. Such as online courses, for example. As for Facebook, sorry, Meta Platforms, that strategic decisions could create volatility for the stock, since most institutional investors were in it for the social media/advertisement aspect combined with smart financial engineering (share repurchases, etc.) and that thesis has now changed because the company will invest tens of billions of dollars in the Metaverse push.
We will stay invested and probably buy more if shares drop again. Facebook is the last of the FAANGs to be led and controlled by its founder and Mark Zuckerberg, whatever you think of him, has proven remarkably good at steering his company and creating shareholder wealth.
To end, in the positive market trend in October, the FFM European Selection fund was up 6.48% for the month and the FFM American Growth fund was up 3.50%.
Fisconsult Fund Management
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