Ruffer Investment Company believes the global investment environment has changed and that many portfolios remain positioned for conditions that no longer exist.
The more important change is the breakdown of the relatively stable global system that supported falling inflation, predictable economic policy and dependable relationships between major asset classes.
The United States is reducing its role as the main provider of global security. At the same time, regional powers are becoming more assertive. The wars in Ukraine and the Middle East show how quickly geopolitical conflict can disrupt energy markets, trade routes and inflation.
Important shipping routes are also becoming more vulnerable. Cheap drones and precision-strike technology allow countries and other groups to threaten maritime traffic at a lower cost. Disruption at major trade routes can restrict commodity supplies, raise transport costs and feed directly into consumer prices.
Government policy is changing as well. The era of smaller government and limited state intervention is being replaced by higher public spending, industrial policy and direct support for strategically important sectors.
Several long-term trends are reinforcing this shift. Artificial intelligence, robotics, electrification and changes in energy systems are creating new areas of economic growth. They are also likely to disrupt employment, industries and communities.
Governments will face pressure to limit the social impact of that disruption. However, many public finances are already stretched. Welfare systems were built during periods of stronger growth and more favourable demographics, while governments have also taken on greater responsibility for protecting households and businesses during financial crises, the pandemic and energy price shocks.
A large-scale default would create severe economic damage, so governments are more likely to try to reduce their debt burdens through growth and inflation.
Deflationary pressures have not disappeared. High debt can restrict demand, while surplus production from China can reduce the prices of some goods. Even so, Western governments and central banks are likely to respond to economic weakness with further stimulus.
This environment creates both opportunity and risk. Growth could broaden beyond the parts of the US technology sector that have dominated markets in recent years. Artificial intelligence, infrastructure, defence, robotics, clean technology, electrification and space-related industries may all attract greater investment.
The challenge is that traditional portfolio protection may become less reliable. During the decades before the pandemic, government bonds often rose when equities fell. This made a portfolio combining shares and bonds an effective way to balance growth and defence.
The US dollar has also provided protection for sterling-based portfolios during previous market declines. More recently, there have been periods when the dollar, US equities and bonds have weakened at the same time.
Ruffer Investment Company is responding by using a wider range of defensive assets. These include commodities, currencies, cash and derivatives designed to gain value during periods of market stress. Its investment trust structure allows it to use these tools with fewer restrictions than many conventional funds.
Ruffer Investment Company Limited (LON:RICA) is a British investment company dedicated to investments in internationally listed or quoted equities or equity related securities
