Consider what “the easy route to a successful portfolio in 2020 would have been”, says Jonathan Ruffer, the founder of the £20bn asset manager that bears his name, in his latest letter to investors. First, hold firms such as Amazon “where Covid-19 has blown a mighty following wind”. Second, recognise “that pressure on central banks to cut interest rates further would be irresistible” and buy government bonds before they did so. If you did either, you had a very good year. “But a change in a single variable will sideswipe both those asset classes at the same time. Their dynamics feel very different, but actually, they are not.”
In the eyes of the market, the long-term earnings power of tech stocks has become “more and more valuable” when “discounted at lower and lower interest rates”. They are now “long-duration assets” (ie, their value is very sensitive to changes in interest rates). So their fate will be closely linked to that of bonds.
At this point, investors hold tech because people “fear not holding these stocks”. They hold bonds not for income, but because of “the chess game that plays out between the authorities and the investment community”, under which markets feel they have policymakers trapped “in low-yield (pushing into no-yield) territory”.
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When sentiment and circumstances change, so will the calculations that prop up both asset classes. “If inflation comes about – or, rather, looks a realistic possibility – you won’t see government bonds or tech stocks for dust.”
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