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The bull market in belief

After reaching extraordinary valuations, zeitgeist stocks are yet to return to reasonable levels
Chart: price to sales last 12 months, Mastercard 15.4, Hermes 15.5, NVIDIA 13.7, Adobe 9.0, Microsoft 8.9, Tesla 8.4
Duncan MacInnes
Fund Manager

In the classic Christmas film Miracle on 34th Street, Kris Kringle is on trial for claiming to be the real Santa Claus. His defence lawyer says, “If this court finds that there is no Santa, I ask the court to judge which is worse: a lie that draws a smile or a truth that draws a tear.” 

Doesn’t that feel like markets recently?

Benjamin Graham, if he were alive today, or even an investor from 2019, might struggle to comprehend the bull market we witnessed in SPACs, crypto, stonks and NFTs. A year ago, investors were buying monkey jpegs for millions of dollars or profitless tech companies promising jam tomorrow. This extraordinary period was a bull market in the willingness to believe. But exposing the truth has drawn a tear.

The silliness seeped into mainstream assets too. This month’s chart shows stocks in global franchises traded to spectacular valuations. The vertical axis is multiples of sales, not profits!

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“At ten times revenues, to give you a ten year payback, I have to pay you 100% of revenues for ten straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next ten years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

Of course, this has all happened before, with the Nifty Fifty and in the Nasdaq bust. Yet, every generation of investors seems doomed to learn from painful experience rather than from history.

So, having fallen from their highs, are these companies now gift-wrapped presents? We say not and see a compelling argument for equities to head lower again in 2023. Stocks are down in 2022 because bond yields are up, we have yet to see any widening of the equity risk premium or a fall in earnings expectations.

The market seems to think four things can happen: the Fed funds rate peaks in Q1; this engenders a soft landing or very shallow recession; that slowdown sucks all of the inflationary pressure out of the system; and all of that can be achieved whilst corporates still generate about 8% earnings growth for 2023.

That story seems like the lie that draws a smile. How could corporates deliver on earnings despite a potential recession, rising labour costs and the huge change in financing costs versus a year ago?

If we’re to see a Santa rally this year, it will be powered by a bull market in belief.

2022 Q3 Investment Review
October 2022: In his latest quarterly review, Jonathan Ruffer reflects on the possibility of an imminent liquidity crisis in markets and looks at why even the safest assets might not prove very safe at all.
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An opportunity at our fingerTIPS
November 2022: Investors are facing a pernicious combination of volatile inflation and an impending recession. After the widespread sell-off across asset classes this year, Jasmine Yeo asks if there may now be an opportunity to take a calculated risk.
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Ruffer Review 2022
Download our 2022 edition of the Ruffer Review. We explore how turbulence lies ahead for investors as inflation volatility sets up to be the biggest challenge for investors in a generation. We also discuss risk and its repercussions, shifts in global politics and Great Power relations, a warming planet and shifting energy mix as well as financial disruption and regime changes.
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Sources: FactSet, data to 30 November 2022 

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. This article does not take account of any potential investor’s investment objectives, particular needs or financial situation. This article reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. This financial promotion is issued by Ruffer LLP.  Read the full disclaimer.

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London
Ruffer LLP
80 Victoria Street
London SW1E 5JL
Paris
Ruffer S.A.
103 boulevard Haussmann
75008 Paris, France
New York
Ruffer LLC
300 Park Avenue
New York NY 10022
Edinburgh
Ruffer LLP
31 Charlotte Square
Edinburgh EH2 4ET