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Martians would be puzzled by this stock market rally!

Fund managers at the Ruffer Investment Company, one of the few investment funds to avoid losses during the financial crisis, have been left baffled by this year's surge in stock markets.


by Sarah Miloudi, Gavin Lumsden on Mar 08, 2013 at 16:02

Martians would be puzzled by this stock market rally!

Fund managers at the Ruffer Investment Company, one of the few investment funds to avoid losses during the financial crisis, have been left baffled by this year's surge in stock markets.

This week the Dow Jones Industrial Average index, one of the main measures of the US stock market, hit an all-time high of 14,343, for the first time passing its pre-financial crisis peak in 2007.

The Dow Jones has risen by more than 9% this year while the UK's FTSE 100 has notched up a near 10% advance since January.

Good jobs figures on Friday helped investors look past the threats of US government spending cuts (known as 'sequestration') that could hurt that the world's largest economy this year. There had been concerns that the gradually improving outlook could prompt the Federal Reserve – the US equivalent to the Bank of England – to halt its policy of printing dollars and flooding the system with money.

This policy of 'quantitative easing' (QE) has been the main reason for the dramatic rise in share prices on both sides of the Atlantic. The QE money is used to buy government bonds which have become so expensive they make shares look good value.

However, Steve Russell and Hamish Baillie, managers of the fund, a long-standing recommendation on our Citywire Selection fund, list, have pointed to the fragility of the stock market rally.

'There was ample scope for a market wobble in February – the Italian election, QE dissenters amongst the Fed’s ranks, the long-awaited downgrade of the UK – but in the end equities [shares] continued their march higher,' they said.

'If this was explained to a recently arrived Martian he would no doubt be puzzled – US unemployment has almost doubled since 2007, GDP [gross domestic product] growth is a third lower and debt as a percentage of GDP is within a whisker of doubling. The market is forward looking but this is extreme,' Russell and Baillie said.

The pair said the extraordinary support offered by central banks would offer an 'eye-popping' explanation to puzzled aliens. Meanwhile earthlings have become accustomed to artificially low interest rates and billions in stimulus being used to prop up growth.

The managers' comments came before a report from Reuters this week revealing the Federal Reserve was considering holding on to the $3 trillion of US government bonds, or treasuries, and other assets it bought with money it created after the financial crisis. Managing to sell these assets without disrupting financial markets would be tricky and the Fed now apparently thinks that holding on to the bonds until they mature would help support the US economy as it finds its legs.

However, Russell (pictured) and Baillie worry that what is happening now is similar to the buildup of the credit bubble in 2007.

Shares in RIC, an investment company listed on the London Stock Exchange, have not fully joined in the stock market rally. The fund, which can invest in a wide range of assets and not just shares, is quite defensively positioned in accordance with the managers' cautious stance. However, in the past six months the value of its investment holdings has shot up nearly 10% as a result of a long-standing bet on Japan's stock market coming good.

Over five years RIC shareholders have enjoyed a total return of 87% on their money, ahead of the 55% gain they would have had tracking the FTSE World index. In 2008/08 at the peak of the financial crisis, the shares famously returned 18% while world stock markets crashed 28%.

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16 comments so far. Why not have your say?

Rob Walker

Mar 08, 2013 at 17:37

a) Is the top photo meant to be Vince Cable?

b) Assuming markets have an intrinsic value which might be measured from a period, say 10-20 years ago at an imaginary time when there were no serious de-stabilising factors, we can look at the current 'Market de-valuers' and decide if these will ultimately crystalise or go away. We can also consider how much additional value there is in the market now, compared to 'then'.

Personally I'd look at a time around year 2000 when the FTSE was around its current level and would therefore expect that within the next 2 years, subject to any serious financial disasters, it would peak at c.7500 (I reckon the FTSE has probably increased its intrinsic value by c.25% since 2000). It's just a hunch but on that theory I'll be selling anything and everything once the FTSE reaches 7100 even if it means missing out on any subsequent gains before the inevitable correction.

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Tony Peterson

Mar 08, 2013 at 17:38

Some people are very easily baffled. Thank goodness I manage my own investments.

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peter montgomery

Mar 08, 2013 at 17:59

markets rise on a wall of worries;sounds like RIC is,currently,wrongly positioned. Tell us when they reverse their bearishness.

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Geoff Downs

Mar 08, 2013 at 18:01

Stock markets to drop by 50%.

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Keith Snell

Mar 08, 2013 at 18:28

I long since ceased being bothered about understanding apparently abnormal behaviour of the market I just know that I think the current level is too high. I am not selling I would rather wait for some sign of a drop and then sell out. I retain a reasonable level of cash available to invest. If we did see a 50% drop or anything far less dramatic than that I would expect to profit from it within 12 months at the most.

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Frankie Dee

Mar 08, 2013 at 19:04

Why would we be looking at a 50% market correction the reason is quite plain why markets are high there are a lot of skint people out there but awful lot of speculators rich people and general investors.

I for one usually invest in property rather than buying a houise I have bought the price of a house in shares i find bank shares attractive bad debts down PPI has to end LIBOR will sort itself I really cant see any downside from here and at todays levels see them as undervalued.

In a few words I am not unique so while I am investing in shares so are numerous others hence the prices go up.

I also see the general economy as vastly improved we have strategies in place to sort out any mess that we didnt have in 2008 the Dow will be 20000 in a few years and the FTSE 10000 you wait and see.

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Tony Peterson

Mar 08, 2013 at 19:34

Geoff Downs.

I think you are, in the short term, mistaken. You are a great one for the gratuitous assertion which, as we all know, can be gratuitously denied.

Mind, after a 200% rise, a 50% correction may be in order.

Should you, however, be right in the short term, just look at the buying opportunities that my dividends and recently realised capital gains will have access to. Hope you are right.

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William Bishop

Mar 09, 2013 at 09:46

Quite simple, really - the funds washing around the system as a result of large central bank injections through QE continue largely to override everything else. Like others, I very much doubt if this can lead to a happy ending, but trying to time a top in these circumstances has so far been somewhat of a mug's game, occasionally including myself in that category.

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Mar 09, 2013 at 11:07


Interesting idea, but aren't you overlooking the effects of inflation ?

The above source suggests there's been total inflation of 36% in the last 13 years. So to get back to where it was on 1/1/2000 in real terms wouldn't the index have to rise to (6800 +36%) = around 9,200 ?

Then add on your 25% increase in intrinsic value, = 11,500 !!

May not be wholly accurate, but suggests there's plenty of headroom for further rises left yet ?

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Dennis .

Mar 09, 2013 at 17:43

let's be honest. None of us have got a clue where the market is going so the only sensible option is to invest in well managed cash rich companies with strong brands.

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Rob Walker

Mar 10, 2013 at 12:27

Thanks kenpen2, you have a valid point although inflation and the stock market rarely move together. We probably agree then that on a sketchy historical value, shares are worth less than 'average' and with a fair wind we should still expect some further gains. The question is at what point are the chances of going up or down 50:50 ? I'd say that's a FTSE 100 value at c. 7250.

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Mar 11, 2013 at 10:08

I'm mostly a passive investor, buy my wife does hold some Ruffer alongside Personal Assets and RIT for diversity.

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Mar 11, 2013 at 11:02

Rob, for me the 50:50 question is the wrong one. It's a trader's question - if you sell every time you think there's >50% chance of a fall and buy whenever >50% of a rise, you'd be in and out all the time. And you'd sometimes (often?) get it wrong.

Like many my shares have had a good run in the past few months and I've started to fret about a possible correction. But what if that run has itself been the correction to a long period of irrationally low valuations ? If that's the case then this rally could still have a long way to go.

I'm interested in a thought prompted by your original post - where's the potential top of the market ? The 1/1/2000 top may have been irrationally high (tech bubble ?) but something similar could easily happen again.

Given that the economy is recovering, companies are "awash with cash" (allegedly), national and global populations are rising, inflation's ticking up (36% since 2000), our exchange rates are ticking down and alternative homes for surplus cash are most unappealing, I can't see why the FTSE can't test 10,000 sometime in the next few years, and I want to be in the market when it does !

Maybe I should change my monicker to Raging Bull.

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andrew m....

Mar 11, 2013 at 14:25

there is still an awful lot of money siting in 1% bank accounts out there, and the top of the market is on average called 18 months before the fall. ???????????

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Dennis .

Mar 11, 2013 at 14:54

Anyone who has lived through a few stock market cycles of rising and crashing knows that it's not obvious that you are in bubble territory and that the crash is a damn site quicker than the rise (which is why amateur investors tend to get drawn in and feed the bubble). At the end of the day the market is not about fundamental pricing issues but about where the herd is moving its capital. The same thing is true of the housing market. So you can analyse all you like but it won't help. Anyone remember the great storm of Oct 1987 which initiated a 20% drop in the FTSE the next day, or the Kobi earthquake?

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Geoff Downs

Mar 11, 2013 at 17:36


Very well said and absolutely true.

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