By Steve Russell, Investment Director, Ruffer LLP


Source: Citi, Dealogic

We all know that 2020 was an incredible, and terrible, year. The pandemic caused the worst recession for centuries, along with an appalling death toll and suffering. Meanwhile, financial assets pushed ever upwards, surfing a wave of liquidity meant to counteract the impact of the pandemic.

This month’s chart shows that it was also a record year for share issuance, surpassing even the heady days of 1999-2000.

We could have anticipated share buy backs collapsing, as sales and profits vanished. Similarly, companies needed to raise record levels of equity to survive the lockdowns.

But who would have predicted IPOs reaching a record level too? Most surprising of all was that SPACs (Special Purpose Acquisition Companies) made up $75bn of that record total, eclipsing the previous record of such issuance in 1999 by over five times.

What, you might ask, is a SPAC? It is a new company, coming to the market and issuing shares to acquire other companies. But without the wearisome requirement of actually saying what marvellous opportunities it has identified.

This is reminiscent of the 1720s South Sea Bubble, when a speculative boom saw investors throw their money at all manner of unlikely projects. Most of them, Isaac Newton included, lost fortunes.

The poster child for the South Sea Bubble was a company promoted ‘For carrying on an undertaking of great advantage, but no one to know what it is’. Almost the perfect description of the modern-day SPAC. But today’s version has $75bn to play with. The 1720s original was more modest, and after receiving £2,000 from subscribers the promoter promptly emigrated.

What relevance does this all have for today? Confident that central banks will keep interest rates at or close to zero, investors assume that there is no risk to today’s sky-high tech valuations and are throwing money at profitless IPOs and secretive special purpose vehicles.

What could possibly go wrong? In a word: inflation

The danger is that markets are focusing on the wrong discount rate. The promise of untold future profits should not be discounted back by interest rates, but by inflation. That is the true measure of the purchasing power of future cashflows, assuming they ever actually materialise. It is inflation, and more precisely the fear of future inflation, that could see the current IPO and SPAC mania join the South Sea Bubble as one of the greatest financial follies of all time.

However, instead of explaining what protections we hold at Ruffer against this – our views on inflation are hardly a secret – I will end with a happier story appropriate to current troubled times.

Not everyone lost their money in the South Sea Bubble. It so happens that one investor, a bookseller named Thomas Guy, sold out at the peak in 1720, quintupling his money. He made so much money that he established a new hospital in 1721: Guy’s Hospital in Southwark – where today’s heroes are fighting the pandemic. May we all be as lucky – and as generous.

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