The rise in global equity markets since the start of 2019 is ignoring the reality of a deteriorating economy, according to Bruce Stout, who runs the £1.6bn Murray International investment trust.
In his latest update to shareholders on February 14, Mr Stout noted that stock markets have performed strongly in 2019 as investors have interpreted the US Federal Reserve, the country’s central bank, as being less inclined to increase interest rates in 2019.
Lower interest rates are generally good for shares, because lower borrowing costs and greater availability of credit in the system should increase the level of consumer spending, and so corporate profits rise.
But Mr Stout is not convinced that the rise in share prices since the start of 2019 is justified. He feels the market is ignoring the reason interest rates are not rising at the pace previously expected, which is that economic conditions are deteriorating, and worsening economic conditions will have a negative impact on company profits, he said.
Mr Stout wrote: "Speculation that US monetary conditions may prove less hostile than feared if interest rate tightening moderates produced powerful equity market performance over the month.
"Scant attention was paid to the potential negative implications that slowing growth has for corporate profits as positive sentiment overwhelmed investment decisions."
Mr Stout has been very cautious on the health of the global economy and consequently on stock prices for many years, and in his latest update he said he is maintaining that outlook.
In contrast, Jacob de Tusch-Lec had been quite positive on the outlook for the global economy and stock markets, to the detriment of investors in his £3.7bn Artemis Global Income fund, which lost 12 per cent in 2018.
However the market rally since January has seen the fund bounce back as it gained 9 per cent.
In his latest update to shareholders this month de Tusch-Lec wrote: "2019 has started well – for the market and for the fund.
"Perhaps, as we suggested last month, the 20 per cent peak-to-trough decline in the market last year really was a buying opportunity – or at least an undershoot.
"Equally, we should acknowledge that January’s gains could prove to be a fleeting bear-market rally – a snapback from what had become an oversold position.
"So, just as we tried not to overreact when markets tumbled in December by rushing headlong into defensives, nor have we scrambled to add to the beneficiaries of the central bank's more patient stance (such as emerging markets)."
david.thorpe@ft.com
