Daily Stock Market Reports

‘I don’t like the stock market’: Research Affiliates CEO Brightman on why inflation is here

Chris Brightman is in the persistent inflation camp.

The Research Affiliates CEO thinks equities will continue to fall, he prefers commodities to stocks, and given the run-up in prices, he has sold his personal real estate.

‘We are in a high inflation environment,’ Brightman said in an interview with Citywire last week, adding that he doesn’t think the Fed will react strongly enough to address the inflation problem. ‘Taking interest rates to 3% won’t get inflation under control.’

The implication for equities is bad. Elevated inflation is always volatile, bringing disorder to equity markets, he argued.

‘Equities will continue to fall,’ Brightman concluded, because ‘we never see a high and stable inflation.’ 

Moreover, EM equities, which Research Affiliates has favored for years, aren’t priced to fight inflation anymore.

“Why should I get my equity exposure from India when I can get it from, say, the UK,” Brightman asked rhetorically, adding that ‘developed ex-US stocks are priced for the same returns [as their EM counterparts].’

Another implication of inflation is that stocks and bonds will be correlated. This is bad news for the typical 60/40 portfolio where the stocks provide growth with volatility, and the bonds provide stability with decent income.

This year through May 6, the S&P 500 is down more than 13% while the Bloomberg US Aggregate is down around 10%.

Instead, investors will have to look to commodity exposure to fight inflation. Getting exposure isn’t always easy for investors, but Brightman laid out the options as being futures contracts – especially in a strategy that rotates exposure – commodity-oriented stocks, and currencies from commodity producing countries.

Indeed, a look at the PIMCO All Asset (PASAX) fund, which Brightman manages with Research Affiliates founder Rob Arnott, shows liquid alts command 12% of the fund’s assets, EM bonds another 15%, commodities 9%, and REITs and MLPs 12% through the end of March.

Less than 25% of the portfolio is in equities, and almost none of them in the US.

PIMCO All Asset All Authority (PAUAX), a more flexible fund also managed by Brightman and Arnott, has 14.5% in liquid alts, nearly 20% in EM bonds, 13% in commodities, and 14% in REITS and MLPs. It also has no US large-cap stock exposure.

Another factor supporting commodity prices is a strengthening dollar, through which Brightman said the US will ‘export inflation to the rest of the world.’ Commodities are priced in dollars, and if the dollar appreciates, it will take more of a weaking foreign currency to buy a barrell of oil or a pork belly, for example.

Over the long run commodities ‘don’t provide a positive return because of productivity growth.’ But Brightman thinks a ‘rebalancing return or a diversification return’ is achievable from a properly managed futures portfolio.

On real estate, Brightman divided the world into public and private markets, and said about the public markets, ‘I like REITs better than other sectors of the stock market, but I don’t like the stock market.’

Regarding private markets, Brightman said ‘in my personal account, I am selling all my real estate. It’s not normal that real estate goes up 20% per year. Mortgage rates are rising quickly, [and] unlike public securities, I can’s sell real estate by pressing a button. [The current moment] is a fabulous opportunity to exit your private real estate investments.’

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