Quarterly Letter

Dear investor,

2024 was a positive year for the economy, companies and markets. In the last twelve months, global economic activity has expanded by more than 3%, inflation has continued to moderate and the main central banks have cut interest rates further. Listed companies reached record earnings levels, after growing 9.5% in the USA and 3% in Europe. Stock markets have not been immune to such a favourable context and most of the world’s major indices ended the year with double-digit rises. 2024 was a good year from every possible perspective.

After an extraordinary 2023, our funds continued to generate good returns and many of them ended the year close to the highest levels in their history. Bestinver Internacional and Bestinfond generated cumulative earnings of 14.3% and 12.8%, respectively, while funds such a Bestinver Norteamérica saw growth of 22.9%. In addition, we want to highlight the excellent performance of our fixed income strategies, which generated returns of 4.2% in Bestinver Corto Plazo and 8.4% in Bestinver Renta. 2024 was also a good year for BESTINVER’s funds.

However, we must not be carried away by optimism or complacency. However solid the economic and corporate fundamentals may be, we must not ignore the fact that important unknowns that were hanging over investors at the start of 2024 remain unresolved today. For this reason, we want to focus our attention on the major strategic issues facing markets in the second half of the decade.

The first and most immediate is the adaptation of the monetary policy to a context in which the consensus of economists points to higher potential growth and lower disinflation. With inflation close to the 2% target in the world’s 45 major economies, it is clear that central banks do not have the same incentives to continue to lower rates as much or, at least, to continue to do so at the same speed. When the facts change, positions have to be rethought and, as far as monetary policy is concerned, the situation at the beginning of 2025 is nothing like it was two or three years ago.

The market must emancipate itself from simplistic thinking that reduces the monetary issue to rate cuts good; rate hikes, bad. The fact is that there are times when rates are raised for good reasons, lowered for bad ones and that, when it comes down to it —i.e. thinking in the long term— the reasons are all that matter. For us, a slower pace of cuts would be the confirmation of economic strength, but we cannot rule out the possibility of occasional episodes of market volatility.

Second, the situation in which the old Europe finds itself —older today than ever— is an economic, political and social puzzle that transcends the continent’s borders. Europe has a huge productivity and competitiveness problem that requires profound and immediate structural reforms. So profound and so immediate that it is difficult not to doubt the existence of the institutional commitment necessary to address them. Documents such as the Draghi Report identify with certainty the much-needed action points to halt Europe’s decline, but without the maximum political determination, they will be no more than a dead letter. It is true that in absolute terms the economic situation is better than it was 10 or 15 years ago, but if as Europeans we do not want to be buried between the USA and China, tackling our relative weaknesses has become vital.

On top of this, the current strategic framework is extraordinarily complex. Chinese competition in key sectors for the European economy is fierce, there is a huge delay in the development of new technologies, Russia is no longer a reliable supplier of cheap energy and the new US administration does not seem willing to make things easier. The Union’s loss of international weight has been a constant in the last 15 years, and events such as Brexit and the war in Ukraine have undoubtedly accelerated this deterioration. But with 5% of the population and 15% of world GDP, it would be naïve to think that this situation only affects Europeans. On the contrary, it is an uncertainty with global political and economic implication that must be addressed by institutions and markets over the remainder of the decade.

A third issue, of particular importance to investors, is the increasingly important role of passive management. This investment style is not new —the first indexed fund in history was born in 1976—. But their unbridled growth in recent years has had an obvious impact on the day-to-day running of the markets: news is discounted in milliseconds, volatility is unprecedented and the weight of large companies in indexes reach record levels in every country in the world. This soulless investment has made today’s market the most quantitative and myopic in history. But for those of us who are BESTINVER participants, this is great news.

Paradoxical as it may seem, when markets become obsessed with maximum efficiency in the immediate short term, long-term inefficiencies arise. Inefficiencies that, at BESTINVER, we are specialised in locating and leveraging. The current situation in Europe is a good example of this. As we have explained, its slower growth compared to the USA is evident both in terms of economic activity and corporate earnings. This reduced dynamism is causing large passive funds to reduce their investments in Europe and redirect them to North American indices. Consequently, 2024 was the worst of the last 25 years in relative terms for European versus US stock exchanges —although, as we mentioned earlier, the current situation in Europe is better than 10 or 15 years ago—.

Soulless investment does not invest in European companies simply because they are European. However, as assets managers we are not only against this clean slate, but can also take advantage of it. Among the thousands of listed European companies there are leading, innovative and well-managed businesses that, thanks to passive management, are trading at discounts not seen in decades compared to their US counterparts. Indeed, the 18% discount at which the European stock market traditionally traded is, currently, around 40%.

Are there reasons for such a discount? Undoubtedly yes.
Are there grounds for applying it to all European companies? Absolutely no. It is precisely in companies trading at unjustified discounts that we find extraordinary investment opportunities.

But Europe is not the only region where passive management has produced inefficiencies. Its obsession with labels, the fashion for automatic baskets of winners and losers, or the endless proliferation of themes of all kinds, have also created good opportunities in companies of all countries, sectors and sizes. If a company is unlucky enough to fall into the wrong ETF, it will be mercilessly sold regardless of the strength of the business model, the visibility of its business or its valuation —the cases of Rolls-Royce or Meta, which have given us such good results, are examples of this—. The clean slate applied by passive management has become an unexpected ally which has allowed us to fill our portfolios with value.

Markets must rethink the weight and attributes assigned to passive management. After a decade of extraordinary results, many think that indexation is the Holy Grail of investment. But experience has shown us that there is no such think in markets. At some point, the imbalances caused by this investment style will be reversed in favour of active value managers who have been able to identify the inefficiencies caused by it. This will mark a period of catharsis in which the new generations of investors, born out of passive management, will rethink their quantitative criteria in favour of qualitative ones. Hence our firm conviction that we are entering a golden age for active management. The value investment proposition is more attractive today than ever before.

A fourth factor that will be decisive for the performance of markets for the rest of the decade is productivity. This issue, which has been the unfinished business of developed economies, has a major impact on long-term economic growth, and yet it does not receive the attention it deserves. But the investments in artificial intelligence that are being made in a multitude of sectors are laying the foundations for a new phase of higher productivity, especially in the US A. Recent data show a clear improvement in their growth rate, which has grown from 0.9% per year in the previous decade to 2% in the last four years. It is a substantial acceleration that cannot go unnoticed.

If confirmed, the improvement in productivity could lead to an environment of higher economic growth and moderate inflation similar to that of the 1990s. Such a context would greatly facilitate the resolution of some of the current structural imbalances, boost corporate earnings and would be extraordinarily positive for equities. Consequently, we must closely follow the evolution of such a relevant factor and its implications for the businesses in which we invest.

The evolution of these four factors will determine the long-term performance of markets. At the BESTINVER investment team, we think there is good reason to expect a positive resolution in all of them. However, we also believe that solutions will emerge at an uneven pace and will give rise to new unknowns that will set the agenda for the next decade. Talking realistically about the future means accepting uncertainty as normal. But that does not mean we should ignore the few certainties we do have. One is that markets will continue to focus on short-termism and each year —just as they did in the summer of 2024— and that we will see episodes of volatility that will allow portfolios to rotate and potential returns to expand.

Another certainty is that stronger and more innovative companies are capable of adapting to the most demanding environments, overcoming any crisis and emerging strengthened from them. Finally, we know that a balanced, diversified portfolio that seeks value without labels wherever it is, is the best way of generating good returns in the long term. With these three certainties we welcome a 2025 full of opportunities.

We thank you again for placing your trust in us and wish you a wonderful 2025.
Sincerely,

Mark Giacopazzi.

 

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