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Ruffer trims equity exposure on political uncertainty

9 February 2017

Ruffer Investment Company has further reduced equity exposure of its defensive global portfolio in response to the uncertainties facing markets.

Ruffer Investment Company (RICA) has reduced its equity exposure in response to the uncertainties of 2017.

‘As is the case every year, 2017 began with a blizzard of forecasts and global prognostications from analysts, strategists and others of the now derided class formerly known as ‘experts’,’ the investment trust’s managers, Steve Russell and Hamish Baillie, said in their latest monthly update.

‘Many of the same boffins who were confidently forecasting president Trump as a left tail event and a negative market shock just six months ago are now equally confident in anticipating a mini-boom in GDP fired by his policies of deregulation and tax-cuts.’

The duo believe that on the whole investors have reacted positively to the policy proposals emerging from president Trump’s White House. However, they argue that now the market will need proof of success before it advances any further. 

Consequently, during January the trust cut back its equity exposure to around 38% of net assets, taking profits in Qualcomm, Microsoft, Conviviality (CVR) and Oracle.

The remaining equities in the portfolio fall into what Russell and Baillie describe as ‘the greed camp’ and comprise of cyclical and financial stocks — which are set to benefit if the current positive growth environment endures and sees interest rates rise.

During January the trust’s net asset value rose by 1.2%, versus a 0.3% decline in the FTSE All Share Total return index. The fund is currently trading at a 2.1% discount.

Russell and Baillie said: ‘The political context changed last year and we must recognise this. The second half of 2016 was the beginning of a new chapter as yet unwritten and the longer electorates see that rebellion does not result in the threatened economic calamity, the more emboldened they will be to depose those in power.’

To counter this uncertainty, in ‘the fear corner’ of the portfolio, Russell and Baillie hold index-linked bonds and gold to protect against a Trump misfire which may result in a surprise economic weakness, inflation and negative real interest rates.

Russell and Baillie warn that ‘the Goldilocks scenario’ of little growth, benign inflation and unprecedented low-interest rates have benefited asset prices. Inflation and growth improvement leading to interest rates will see financial conditions tighten.

‘Counterintuitively, history tells us that strong growth can be bad for the stock market when coupled with either higher inflation or higher interest rates. Investors should be careful what they wish for.’

‘Looking back to the events of last year, and their likely influence on markets in 2017, we are reminded of a quotation from the unlikely source of Vladimir Lenin: "There are decades where nothing happens; and there are weeks where decades happen." Will history show that Brexit or Trump were such moments in time? If one looks through a long enough lens, the period since 2009 feels like a single chapter in history.’

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