The impact of the current pandemic has been felt across the world. From work to leisure, lockdowns and self-quarantine are changing the way we live, work and invest.
The S&P 500, an equity index in the US, went from its peak to a bear market (a 20% fall) quicker than ever before (source: Yahoo Finance and Ruffer). We have long been fearful of such an avalanche (although that is not to say we predicted the virus) and crucially how conventional offsets, such as bonds and gold, would respond in such a fall. Would they play the protective role many traditional portfolios rely on them for?
The answer, surprisingly, was no. At peak turmoil, conventional offsets (bonds, gold) proved flaky friends: investors sold what they could, not what they perhaps should. As a result many investors had few places to hide as they saw most, if not all, parts of their balanced portfolio fall.
On Sunday 15 March, amidst extreme market turmoil, the US Federal Reserve threw the kitchen sink at the crisis – rates to zero, massive quantitative easing. Stocks plunged the following day. This was the Fed’s “emperor has no clothes” moment.
Enter “helicopter money” – central bank financing of governments’ fiscal stimulus of the real economy (eg tax cuts, infrastructure, furloughed wages, etc). Longer-term, higher real world inflation is likely, even as rates remain nailed to the floor.
We believe that the end of the longest bull market on record will prove to be a crucial inflection point. This may well be the moment where:
- Investors can no longer rely on monetary policy to bail them out;
- “Buying the dip” will no longer prove to be the optimal investment strategy;
- Bonds and equities may not protect one another in the future;
- Inflation rears its head again as a very credible – and dangerous – threat to investors that will force a re-thinking of how traditional portfolios are constructed.
We strongly believe that investment portfolios need to look forward and take account of the new regime we are entering, rather than being built for the one we have just left.
We believe the solution should include inflation-protected bonds, gold, defence against further deterioration in credit markets, and the right sort of equities for a changing world.
Ajay Johal is an investment manager at Ruffer
Ruffer LLP is a limited liability partnership, registered in England with registered number OC305288 authorised and regulated by the Financial Conduct Authority. The information contained in this article does not constitute investment advice or research and should not be used as the basis of any investment decision.