Material world

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Articles by Jasmine

Jasmine Yeo

Fund Manager

8 May 2024

“Things last longer than emotions,” claimed Madonna in her 1980s hit Material Girl. And it has been an emotional ride for markets in recent months, with disinflation euphoria and hopes of multiple interest rate cuts making way for sticky inflation and interest rates staying higher for longer. Investors are increasingly questioning whether they need more exposure to the material world for a truly diversified portfolio.

The latest data – especially in the US – shows that disinflation has stalled. Core CPI rose at a three-month annualised rate of 4.5% in March and core PCE – the measure targeted by the Federal Reserve (Fed) – ticked up to a three-month annualised rate of 4.4%. Both uncomfortably above central banks’ 2% target.

There is a growing risk that inflation will be both higher and more volatile than the market (and the Fed) currently expects. Another uptick would threaten richly valued equity and credit markets but, at today’s prices, investors have an opportunity to prepare portfolios for a new regime.

This month’s chart looks at the relative pricing of ‘real’ and ‘financial’ assets over the past 50 years – shown here as the performance of commodities versus US equities since 1970. When the green line is high, commodities trade expensively compared to stocks, and vice versa. On this measure – with history as a guide – commodities are as cheap as they have ever been, even with the strong rally we’ve seen over recent weeks.

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Ruffer’s Head of Investment Strategy, Teun Draaisma, recently published research which explored asset class performance during inflationary episodes across the US, UK and Japan over the past 100 years. The findings were clear: bonds and equities tend to do badly, and commodities perform very well. In aggregate, commodities had a perfect track record of generating positive real returns during inflation regimes, averaging an annualised real return of 14%. This contrasts with non-inflationary periods when commodities typically produced low single digit returns.

We see the potential for commodities to be a key diversifying asset in a world where 2% is the inflationary floor rather than the ceiling. It’s also worth noting that whilst gold played a role in the broader historical outperformance of commodities, it was found to be unreliable on its own, having returned 13% annualised on average, but with positive returns only two thirds of the time. A diversified basket of commodities appears to be the key. The Ruffer portfolio has 10% in the commodity theme, across oil and gold mining equities, copper and silver bullion exposure (which proved effective through April, rising by around 20%).

So, whilst investors have been loading up on bonds and growth equities in the hope of imminent rate cuts, if interest rates stay higher thanks to a motoring US economy, the next market winners could look very different. But many portfolios appear to be anchored to those assets which worked well during the past two decades of disinflation.

To leave the herd carries risk – a risk many investors are unable or unwilling to take – but one we believe will be vital to successfully navigate the next phase in markets.

#gold, #inflation

Articles by Jasmine

Jasmine Yeo

Fund Manager

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Piers Wheeler

Director – Institutional

T +44 (0)20 7963 8258

Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

T +44 (0)20 7963 8123

Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

Articles by Annabel

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