InvestmentsMar 9 2018

Aberdeen’s Stout stays bearish despite trust's torrid year

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Aberdeen’s Stout stays bearish despite trust's torrid year

Central banks don’t understand how the global economy really works and so have created an unsustainable economic model based on debt, according to Bruce Stout, who runs the £1.6bn Murray International investment trust.

Mr Stout’s bearish view of the global economy proved costly for investors in 2017, with the trust returning 11 per cent in the year to 31 December, compared with 17.5 per cent for the average trust in the AIC Global sector in the same time period.

In the annual report of the trust Mr Stout said markets were driven in 2017 by “a widening chasm between economic theory and economic reality.”

He said: “For central bankers, cocooned in the economic theory of how the world should work, scant attention was paid to how it actually does."  

Nearly thirty years of interest rate declines have created an economic landscape "addicted to cheap money and available credit", he said.

"Unable and unwilling to effectively manage expectations, central banks spawned a debt-dependent culture now endemic throughout most of the developed world.  

"How ironic then that, having created such an addiction, policy intentions over the past twelve months focused on theoretical initiatives inherently precarious to global debt-dependency. The stated intention to increase interest rates dominated policy debate."

A desire to normalise monetary policy has gone from "pragmatic pondering to dogmatic doctrine", Mr Stout said.

"In the United States, three consecutive interest rate hikes by the Federal Reserve ignored frail fundamentals, exposing economic fragility to rigid conventional theory. The implicit intention was rates would rise regardless, and they did.

"Policy rhetoric in the UK adopted similar resonance, but the Bank of England lacked the credibility to practise what it preached.  With Brexit induced uncertainty undermining confidence, one solitary quarter point rise in base rates was all that could be stomached.”

Mr Stout branded central banks "unelected institutions [whose] arrogance and irresponsibility...beggar belief".  

He cited the Institute of International Finance, which has claimed that by the end of 2017 global household, government and corporate debt reached record highs of over 300 per cent of global GDP.  

"Up 50 per cent over the past decade, this unsustainable debt burden was no longer just a "growing source of concern", according to the IMF. It had quite simply become the single largest influence on current and future economic policy, an addiction of epidemic proportions that detached global policymakers misjudge at their peril.”

The Murray International trust has also under performed its peer group over three and five years. The annual report of the trust reveals that the best performing investments of 2017 were its holdings in emerging market equities, notably Taiwan Semiconducter Manufacturing and Unilever Indonesia.

The trust trades at a premium to its net assets of 4.2 per cent, with a dividend yield of 4 per cent.

David Miller, investment director at Quilter Cheviot, said central bank policies in recent years had been effective.

He said the financial crisis was like "you have a hole in a bucket of water, and the water is spilling out. QE is like putting more water into the bucket to stop the bucket emptying, while policy makers have a chance to fix the hole".

Patrick Thomas, investment manager at Canaccord Genuity Wealth Management, said: "With deliberately low turnover and bearing very little resemblance to its benchmark, Murray offers the highest yield in the global equity income sector peer group.

"The recent share price correction offers an opportunity to buy a manager who thinks differently and manages his portfolio with discipline."

david.thorpe@ft.com