InvestmentsOct 23 2018

Caution on equities 'warranted' as markets fall

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Caution on equities 'warranted' as markets fall

The inevitability of lower growth due to trade disputes and higher interest rates means the caution displayed by equity investors is justified, according the manager of the £1.6bn Murray International investment trust.

Bruce Stout's comments came as most global stock markets fell today, with a sell-off of Chinese equities overnight precipitating a sell-off in European shares as investors continued to fret about global trade disputes, a disorderly Brexit, rising US interest rates and the Italian budget process.

The Shanghai Composite index is down 2.26 per cent while the EuroStoxx had fallen 1.56 per cent at the time of writing. Meanwhile the FTSE 100 was 0.73 per cent lower and the S&P 500 index was 0.43 per cent down.

Mr Stout said: "Nobody wins under global protectionism. History clearly shows how distorting the worldwide movement of goods, services and capital always results in lower growth and higher inflation.

"As the world’s two largest economies, the United States and China, ratchet up the trade war rhetoric the negative consequences for consumers in the import-dependent developed world are painfully obvious.

"Lower spending, lower growth and overall decelerating economic activity appears increasingly inevitable as already extended business cycles in the United States, the UK and Europe finally come to an end. Great caution continues to be warranted."

Mr Stout has long been extremely cautious on the growth outlook for the world and has been positioning his portfolio for increasing market volatility for several months.

Markets had rallied yesterday as the Chinese government responded to weaker than expected GDP growth by announcing a fiscal stimulus, but this rally failed to last more than a day as the optimism was swamped by fears any stimulus would be offset by a trade dispute.

But one of the other drivers of current volatility has been the Federal Reserve's decision to increase interest rates twice in the space of four months which strengthened the dollar.

Emerging market assets tend to perform badly when the US dollar is strong because many emerging market economies and companies must borrow in dollars, so when the dollar rises in value, costs of repaying existing debt or borrowing more rises, leaving less cash for shareholders, to expand businesses, or for government spending.

Added to this has been the recent uncertainty caused by the Italian budget process, where Italy's government wants to increase spending to meet its election pledges but has faced opposition from the European Commission because it would push Italy's debt above the EU's permitted levels.

Chris Beauchamp, senior market strategist at IG Group, noted that in addition to fears about the impact of Italy’s budget crisis and trade disputes, markets had been driven lower by a number of companies in Europe reporting worse than expected financial results.

Jacob De Tusch Lec, who runs the £4bn Artemis Global Income fund, said investors had responded to rising interest rates by ignoring what appears to be strong economic growth and jumping straight to cautious investments.  

david.thorpe@ft.com