Ruffer: BoE QE ‘liquidity binge’ may cause fresh crisis

The UK managers of the Ruffer investment trust are concerned further monetary easing may lead to another financial crisis on a par with 2007/8 as talk of yet more stimulus fuels ‘risk-takers’.

Managers Steve Russell and Hamish Baillie, speaking ahead of the Bank of England’s decision to hold fire on more QE for now, said further stimulus from central banks has left markets and investors facing similar risks to those seen prior to the financial crisis.

They said: “Many moons ago we wrote of the moral hazard in monetary policy where risk-takers were offered the protection of the Greenspan put, or whatever assortment of goodies that might fall out of Dr Bernanke’s helicopter.

“A similar sequence of events is unfolding now and there are parallels with the years leading up to the credit crisis.”

The managers point to the continued market rally in February, despite “ample scope for a market wobble” on the back of the Italian election and the UK’s loss of its AAA-rating.

“In the UK and the US [equities] are now within touching distance of the dizzy pre-crisis highs of 2007. If this was explained to a recently arrived Martian he would no doubt be puzzled,” the managers said.

Their main concern is today’s monetary policy is encouraging excessive risk taking, which at some point may “come back to bite us if not addressed”.

“This does not necessarily mean that we are on the verge of stumbling over the cliff but the risks are there and worth protecting against,” they said.

“We are happy not to participate fully in this liquidity binge if we are holding assets that will protect us from the inevitable hangover that follows.”

The directors have not made any changes to the portfolio since January, and continue to hold a large portion of the trust in gold – one asset which would typically offer protection if equities do indeed sell-off. They currently have 11% in the asset class despite its recent performance.

The trust itself delivered a return of 1.1% in February, behind the 4.9% made in January.

The managers said this more “sedate” performance is “perhaps a better representation of the steady Ruffer pace to which we aspire”.

Returns in February were driven primarily by exposure to Japan, which continued to rally on the appointment of a new governor of its central bank, as well as assets held outside sterling, which helped hedge against the currency’s weakness.

Some 40% of the fund has exposure to other global currencies and one third of the sterling exposure sits in index-linked gilts, which the managers expect to benefit from imported inflation resulting from a weaker currency.

 

This article was first published on Investment Week

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