Billionaire investor Hamish Douglass, who's the lead investor of global equity funds like Magellan Global Fund (ASX: MGF), has said that rising interest rates could cause big problems for the share market.
Hamish Douglass webinar
In a webinar yesterday, entitled 'Global equities: The year of living dangerously', Mr Douglass gave his latest thoughts about the share market, inflation, interest rates and other topics.
As a build up to the webinar, the following questions were part of the advertising for the event: "With a backdrop of emerging viral mutations, vast global fiscal stimulus, zero interest rates and possible pressures on inflation numbers entering the view finder, how is risk being priced? Was November's stunning market rally a one-off? How do we see 2021 panning out? With these issues currently at play, markets appear complex, even dangerous."
The Australian Financial Review reported that he said that share markets could face a "huge reckoning" if inflation causes central banks to increase interest rates which would be a disaster, according to Mr Douglass.
The AFR quoted Mr Douglass saying:
Interest rates are close to zero [and] asset prices are very high, reflecting low interest rates. If you raise interest rates to head off a real inflation threat, then hang on to your chairs.
If I have to take a view I think this will be transitory, the fiscal stimulus will pass through the economy, and then we are going to be looking back into a factual situation of lower long-term structural economic growth.
But I do think that the bond market is going to be very volatile through the rest of this year. People know that bond rates have gone up.
Interest rates aren't the only thing on Mr Douglass' mind right now. You've probably read about how a subreddit on Reddit called wallstreetbets, which is essentially a forum for people discussing shares, decided to heavily invest in the US gaming retailer called GameStop Corp (NYSE: GME). The share price has been very volatile since then.
Mr Douglass said that the amount of people who were essentially gambling on GameStop, with no relation to investment principles, scared him. The more people that did it, the more it worries him about how it could end and unwind.
How is Mr Douglass positioning the portfolios?
What is one of Australia's most famous investors doing with all of the above in mind?
He's not afraid of going having cash, sometimes the portfolio has had a cash position of more than 10%. At the end of January 2021 the Magellan Global Fund had a cash position of 7% of the portfolio. In the webinar he said that the portfolio is currently 96% invested.
However, the Magellan Global Fund has investments in a number of consumer staples and utilities which Mr Douglass claims would very likely be resilient if there's elevated levels of inflation.
At the end of December 2020, it had names in the portfolio like Starbucks, Reckitt Benckiser, PepsiCo, Nestle, Yum! Brands, McDonalds, Estee Lauder and LVMH (Moet Hennessy Louis Vuitton).
Only time what is going to happen with inflation, interest rates and the share market.
