Ruffer dials up protection as Fed says inflation not transitory

Equity and credit markets as vulnerable as they have been since the market falls of March 2020

Ruffer Investment Company has increased inflation protection, including upping its weighting to the longest dated inflation-linked bonds in the UK, on the belief that central banks will be unsuccessful in keeping a handle on rising inflation.

The investment trust’s net asset value dropped 0.3% during November, but not as much as its benchmark, the FTSE All Share, which fell 2.2%.

Writing in the latest investment update, the managers Hamish Baillie and Duncan MacInnes (pictured), said in an “action-packed” month Federal Reserve chairman Jay Powell waited until the last day to admit that inflation will linger and that it was “time to retire the word transitory”.

“This shift is a material change and marks the beginning of a new market dynamic,” they said. “We have moved from a question of whether inflation is transitory to whether central banks have the willingness and the ability to bring this lingering, sticky inflation back down.”

They said GDP predictions could be another reason for the central bank to dial down stimulus, with the Atlanta Fed GDP Nowcast anticipating real US GDP for Q4 will be above 8%. This, coupled with inflation potentially annualising at 6% for the quarter, gives US quarterly nominal GDP of close to 14%.

“These powerful economic fundamentals put pressure on officials to dial down stimulus.”

They added: “The combination of strong economic fundamentals and a need to tackle inflation will see central banks try to slow price rises through tighter financial conditions. This makes equity and credit markets as vulnerable as they have been since the market falls of March 2020.”

As such, the Ruffer team increased its allocation to the credit protection strategies, added to the portfolio’s equity option protection and reduced the equity weight to just under 40%.

“If inflation does not react as central banks hope and they have to go harder with their liquidity withdrawal, we are confident we have the protections in place to withstand the likely equity market tantrum,” they said.

It also upped its weighting to the longest-dated issues in the UK to 15% and added to the new 2073 index-linked bond.

“The bigger question is perhaps whether inflation will be able to be brought back to target or is the genie well and truly out the bottle. For this eventuality, the longest-dated inflation linked bonds remain primed.”

See also: Ruffer raises less than a quarter of the £170m it was seeking from share issue

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