Our view is that we have entered a new regime of inflation volatility, with periods of high inflation (like 2021-2022) followed by aggressive disinflation (as was the case in 2023). That’s important because it doesn’t just change which assets perform best, it also changes the way the assets in a portfolio relate to one another – as illustrated by the chart. If inflation is a more persistent risk, and one to which the market currently ascribes a near zero probability, then it changes the way assets should be priced and portfolios need to be constructed.
In 2022, investors lulled by the illusion of diversification suffered as stocks and bonds became positively correlated to the downside and many alternative assets revealed themselves as duration in disguise. Whilst 2023 reversed these losses, bonds and equities continued to move in the same direction – just up, not down. At the start of 2024, we appear to be back in an environment where the major asset classes are falling together.
What if the risk rally of 2023 has given investors a golden ticket – an opportunity to rebalance and re-orient their portfolios for a future they are ill-prepared for, and to do so at 2021 prices? This is a second bite of the cherry most would have given anything for in October 2022.
The catch: it is nearly impossible to distinguish between a ‘normalisation’ back to a world of low, stable inflation and a disinflationary leg within a regime of inflation volatility. So we would argue investors should have exposure to both. At Ruffer, we are taking the other side of the perceived market certainty that inflation has been conquered. In doing so, we offer investors exposure to a genuine, uncorrelated alternative to both conventional and less conventional asset classes.
