Economic Outlook: Markets go back to the future

01 Jun 2022 Research

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In the Back to the Future trilogy, the bad guy is a bully called Biff Tannen.

The megalomaniac mogul amassed his wealth because his older self travelled back in time to give his younger self Grays Sports Almanac, a compilation of every sports result from 1950 to 2000. As a result, Biff was able to earn a fortune from sports betting.

Financial markets remind us just how hard it is to predict the future and just how wonderful foresight would be. Yet, in the first quarter of 2022, even Biff would have been bashed.

The best-case scenario for stock and bond investors was a – 4.5% return from high yield bonds. Equities, sovereign bonds, corporate bonds, infrastructure, property, private equity, private credit, venture capital and cryptocurrencies all posted negative returns. There was nowhere to hide – and that is before adjusting for 7% inflation.

An illusion

We have called this the illusion of diversification. The charity balanced portfolio was not balanced. The assets investors believed to be diversifiers for charities turned out to have higher cross-asset correlations than first thought. They all appear vulnerable to the same risks – rising interest rates and rising risk premiums, which both appear to be happening at the same time. The only place to hide in conventional assets was commodities.

In the 165 quarters since 1980, only five times have markets been so dismal that even Mystic Meg couldn’t have conjured a positive return. For the last time this happened, we must travel back to 1990. The scary thing for investors is that the current quarter appears to be offering more of the same. In April, the Nasdaq had its worst monthly performance since 2008, falling 13.3%. Bonds fared little better – the Bloomberg Global Aggregate index, a broad-based fixed income benchmark, fell 5.5% over the month.

At Ruffer, we expect the coming decade to have similarities to the 1970s – a period of political, economic and inflationary turmoil – with all the market volatility investors dread. Unfortunately, this time nobody has Grays Stockmarket Almanac.

To preserve capital, investors will require a new approach to constructing portfolios – flexible, adaptable, robust and responsive. Being unbenchmarked and unconventional could prove crucial. 

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.
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