The stockmarket bull run of the past four decades is due a reversal and growth investors will be the ones to suffer, according to Jonathan Ruffer, chairman of the self-named investment management group.
In his latest investment review Ruffer explained that the last secular bear market was 40 years ago, and since then markets have continuously climbed, punctuated by the odd crisis which caused short, sharp drops. This is evidenced by the S&P 500, which over the past 150 quarters has made a positive return 71% of the time.
Using data from FE Analytics, Trustnet found that this percentage also rang true over the past 17.5 years (or 70 quarters).
However, Ruffer said “the sky is about to change,” and markets will “grind lower, punctuated by rallies of prodigious strength”.
If these rallies don’t occur Ruffer added it would be a “miserable experience” for the long-term growth assets that have benefitted from the beneficial environment over the bulk of the past decade.
Trying to time the market and “buy the bounce, which never comes when it should,” will be the main “menace tactic” during this next period that investors need to avoid, the chairman added.
“For this next phase, we make no prediction on longevity, only on challenges – we expect it to be like sitting on an open Aga [oven] with bare buttocks: time will indeed pass slowly.”
The catalyst for this inversion in markets is the sheer amount of debt that has been taken on by governments around the world and specifically the issues of alleviating it, which he described as an “inescapable problem”.
In the UK the debt to GDP ratio was 106% at the end of March 2021, according to the Office for National Statistics’s latest data. According to Ruffer, this ratio was significantly higher in other parts of the world, such as the US and France as well.
“Many have nervously worried that the Rubicon has at last been crossed,” Ruffer said.
The main issue is that borrowing money creates vulnerability, the chairman explained, yet it’s been a frequent tactic by governments and central banks with the ongoing quantitative easing (QE) program.
How the debt will be reduced is the crux of the issue; either through economic growth, austerity or taxation.
The UK government has recently taken the latter approach in an attempt to tackle the billions of pounds taken on to deal with the Covid-19 crisis.
However, this is “proving difficult politically,” said Ruffer, making it unlikely that this tactic will be replicated worldwide.
“The world is therefore trapped on a ledge, savaged if interest rates go up, compromised if asset prices go down, unable to stop the debt pile increasing until buyers go on strike,” Ruffer said.
For investors who think that the bull run will only continue, they will be blinkered to any evidence of a coming crisis.
“That is like mistaking a mastiff’s growl for a conversational clearing of the throat,” Ruffer said.
“This all gives a fleeting sense of knowledge – but true knowledge lies in a different place. The magician deceives his audience by actions, which draw attention away from the things that matter.
“Central bankers have no need of such prestidigitation – their followers are happy to deceive themselves. Our prediction? It will continue thus until it breaks – at which point the mastiff will have pounced, and a generational inversion in markets will begin.”