Quarterly Letter

Dear investor,

Instability on the international stage has once again impacted on market performance. Following a strong start in the first two months of the year, the main indices ended the quarter lower, -1.5% in the case of the Stoxx 600 and -4.6% for the S&P 500. Geopolitical turmoil(1) has offset the favourable economic growth outlook and strong corporate earnings with which the equity markets kicked off 2026. This dichotomy between prices and fundamentals pushed stock prices lower, but it also enabled us to buy into sound businesses at attractive prices. However, despite the long-term BESTINVERopportunities, we cannot ignore the current fragile climate arising from the escalating tensions in Greenland, Venezuela and, in particular, Iran.

Historically, the markets have baulked at any sign of instability in the Middle East. It is no coincidence that ancient maps placed the region at the centre of the world, with Jerusalem at its heart. Evidently, a theological view of the region shaped this position, but it was also a reflection of how trade was organised at the time. Trade routes from Europe, Africa and Asia all converged in this region, which has served as a hub for the transit of goods since time immemorial. It was a pivotal location that, in essence, has not changed.

If we look at a modern map and examine the routes of the major maritime trade routes linking the producer nations of the East with the consumer nations of the West, we can see that the strategic axis is still there. This historical continuity explains why any friction in the region quickly escalates from the regional level and instead becomes a systemic event, with far-reaching economic, political and social consequences on a global scale.

What has changed, however, is that the transition from land routes to sea routes has shifted the strategic balance of power. The importance of land crossings has been overtaken by the straits and canals through which the majority of global trade is now shipped. In Iran, the epicentre of the current crisis, the Strait of Hormuz is a key hub for the supply of oil, gas and petroleum products. These commodities are essential to the stability of critical sectors such as energy, chemicals and agricultural —due to their link to fertilisers— as well as the metallurgical industries. Similarly, to the west, the Strait of Bab-el-Mandeb is the natural gateway to the Red Sea and the Suez Canal, a vital waterway through which millions of tonnes of goods transit each year.

Added to this logistical importance is the volume of air traffic. Dubai Airport, which handles more than 95 million passengers each year, is a key hub connecting East and West via the Eurasian corridor. If we add Qatar Airport, which handles 30 million passengers a year, we are clearly looking at a crucial site in the global air transport network. Furthermore, the region serves as a vital hub for undersea fibre-optic infrastructure, through which the data required to coordinate the complex supply chains between Europe and Asia are routed. All this makes it a critical location for the global flow of energy, goods, people and information. The Middle East is still the centre of the world.

The link between geopolitical tensions in Iran and the markets has been driven by inflation expectations, fuelled by higher oil prices and potential disruptions to supply chains. If this crisis persists, it could push inflation and interest rates higher and stall economic growth. This is exactly the opposite scenario to the one we faced at the start of the year, and it explains the synchronised correction in fixed income and equities.

We are taking an agnostic stance on any possible scenario, as it is currently impossible to determine whether we are facing a shift in the economic framework or merely a temporary shock. However, the market, with its usual short-term focus, has chosen to try and predict the unpredictable and has quickly succumbed to pessimism. This is a game that long-term investors should avoid, but at the same time take advantage of.

At Bestinver, we understand that geopolitics is fraught with uncertainty. Accordingly, rather than trying to predict the unknowable, we prefer to stay grounded in the few certainties we have. Firstly, the movements in the indices over the course of the quarter are within the statistical norm for the stock markets. Quarterly declines of between 1% and 6% is not unusual in the equity market, regardless of the economic climate. Indeed, pullbacks from highs (-9.6% for the Stoxx 600 and -9.1% for the S&P 500) tend to recur every 18 to 24 months. Consequently, despite the media hype, at the end of the first quarter, nothing has been broken in the structure of the markets.

Secondly, equities are now significantly more attractively priced than they were at the start of the year. This compression of multiples stems from a mismatch between falling share prices and corporate earnings that continue to rise. Clearly, given the current situation, we cannot rule out the possibility that earnings growth may be slightly lower than the 12% we had expected in the United States and the 9% in Europe. However, as the underlying fundamentals remain strong, we believe that current valuations are consistent with attractive returns for the equity markets in the medium to long term.

Thirdly, there are three factors that suggest optimism. Of these, the first is that the decarbonisation of industry has made the economy and markets less vulnerable to an energy shock today than they had been at any time in the last 50 years. The second is that the private sector’s low leverage and AI-driven productivity gains not only help cushion the impact of the current crisis, but also lay a solid foundation for future growth. The last is that international tensions have acted as a galvanising force for the European project, strengthening the EU’s strategic autonomy in the 21st century. Above the noise, there are positive structural factors that will shape the direction of the markets over the coming years.

Looking at our portfolios, the results for the quarter reflect the widespread sell-off in the indices. Bestinfond and Bestinver Internacional have dropped by -2.71% and -2.35%, Bestinver Bolsa has dipped by just -0.33% and Bestinver Renta by -0.82%. But what is truly significant in the long term is that, behind these results, there have been significant shifts in their market positions. We have harnessed volatility to increase our exposure to high-quality businesses —ones capable of adapting to the most challenging environments— at very attractive prices. As we explained in the newsletters from Bestinfond and Bestinver Internacional, the outlook for our main portfolios far exceeds that of the market, with forecast growth of 90% in normalised free cash flow over the next four years. This strategy has enabled us to increase the funds’ potential beyond what it was at the start of the year.

We have come to the end of an exceptionally challenging quarter. Geopolitical instability has overshadowed the solid fundamentals that drove the economy and the markets at the start of the year, but it has by no means negated them. This decoupling of share prices and fundamentals is allowing us to boost the potential of our portfolios. With the patience and discipline characteristic of the Bestinver Method, we are using the current crisis to lay the groundwork for high returns in the years to come. Uncertainty will persist over the coming months, but in the medium to long term, we have the necessary foundations in place for the intrinsic value of our companies to ultimately flourish.
To close, I would like to thank you again for your trust.

Yours,

Mark Giacopazzi.