The month of September, which is often characterized by market disruptions, has, once again, lived up to its reputation: the S&P 500 fell by -3,63%, the Nasdaq 100 by -3,85%, the Euro Stoxx 50 by -3,71%, and the CAC 40 by -2,46%. Chinese tensions (linked to the potential bankruptcy of real estate developer Evergrande), combined with persistent issues on supply chains and the ever- recurring concern about inflation finally undermined the positive summer months’ market rallies.
Despite some seemingly modest drops in the indices (because the current correction is indeed relatively insignificant), a closer scrutiny of the facts reveals some huge differences. Some of the bigger performers of 2020 have been hit by extremely violent corrections since the start of this year.
For instance, Zoom Communications (which we all probably have used at least once since the beginning of the pandemic) corrected by -9.67% over the month of September and by practically -50% over the last twelve months. Conversely, some of the 2020 outcast stocks, such as ExxonMobil, have soared, posting + 7.89% over the month and practically + 90% over the last twelve months. Financial markets are often described as bipolar by some analysts and 2021 seems to prove them right. What no one wanted last year is what everyone wants today. And how about tomorrow? Who knows!
Only a month ago, we wrote the following: “Many of our clients kept asking the following over the past few weeks: 'given the excellent performance since the start of the year, wouldn't it be worth to take 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 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 2020? ".
The same applies today. While it might seem logical to take some profits after a significant rally, it may not be the right thing to do. The key question for us is whether this increase is exaggerated or simply a reflection of the real economic performance of the underlying companies held in our portfolio. In most cases, the increase in the market value of a stock is indeed correlated with its real economic performance.
Sometimes it is slightly higher, but there is nothing that indicates a strong exaggeration, nor a bubble. In this context, and considering the opportunity cost of cash compared to holding a good quality stock that generates between 12% and 18% growth per year, the choice seems clear.
Retrospectively, stock market results for September, will lead some to regret not having opted for profit taking. Obviously, one is always wiser after the event, but the fact is we have not changed our stand. As with every correction, it is difficult to predict its duration and depth. It is a fact that the strain on supply chains contributes to an upward pressure on inflation and interest rates, but again, this is a transitory phenomenon and it may well be that deflation will already be envisaged next year.
Diverging views are therefore very pronounced in 2021, and it is not surprising for our two funds to show negative performances for the month, since they were especially impacted by the lack of exposure to the banking, oil and commodities sectors. FFM European Selection declines by -5.92% and FFM American Growth by -4.11%.
Fisconsult Fund Management
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