Murray International issues recession warning

“Great scepticism is warranted,” according to Murray International trust manager Bruce Stout, who has warned that the likelihood of central banks achieving a balancing act of withdrawing monetary stimulus and avoiding recession “is virtually zero.”

Murray International issues recession warning
Bruce Stout


In his outlook for 2018, the Aberdeen Asset Management senior investment manager took a pessimistic view on the transition away from quantitative easing to a normalised interest rate environment.

While there has been a wide range of speculation that the next five years could be “anything from glorious to catastrophic,” the truth is, we just don’t know, said Stout.

However, what can be said is that the normalisation of interest rates will not go as smoothly as central bankers have theorised it will.

“Withdrawing monetary stimulus, shrinking sovereign balance sheets, maintaining confidence and re-establishing positive real savings rates whilst simultaneously trying to avoid recession and control inevitable credit quality problems is essentially what is proposed. The likelihood of achieving such an exceptionally tough balancing act is virtually zero.

“In the real world, the monumental debt overhang means the more the cost of money rises, be it by balance sheet contraction or by interest rate hikes, the more likely credit dependent growth evaporates.”

Moving forward, companies that can exhibit “strong balance sheets and realistic profit expectations” and are “operationally exposed to countries around the world with sustainable, domestic, growth dynamics” will continue to be king, he said.

The word of caution comes as the Aberdeen trust unveiled its annual results for the year ended 31 December 2017, in which its net asset value (NAV) total return fell from 40.3% in 2016 to 14.7% after fees in 2017.

The share price, meanwhile, posted a total return of 11% versus 50.5% in 2016. The trust’s net assets are worth £1.56bn.

However, it NAV still had the edge over its benchmark, a composite index comprising 40% of the FTSE World UK Index and 60% of the FTSE World ex-UK Index, which only posted total returns of 12.8%.

But the margin of outperformance was slim when compared with the previous year when the FTSE 250 trust returned nearly 40% more than the composite index. Overall its total return fell 64% between 2016 and 2017.

More recently, the trust has struggled to outperform its benchmarks, delivering a negative NAV total return of -3.9% in sterling terms on a six-month view.

Despite the notable dip in NAV total returns, Kevin Charter, chairman of Murray International, said it was still a “solid performance” given that “excessive debt, ultra-low bond yields and anaemic inflation” have squeezed returns on cash deposits and have fuelled widespread asset price inflation.

This “cocktail” brought about by the emergency monetary stimulus efforts of central banks worldwide has “inflated equity and bond prices to levels history would suggest are now very overvalued,” he said.

“How markets will respond to rising short term interest rates and the withdrawal of quantitative easing is an open question. It does seem sensible to prepare for a period of low equity returns, accompanied by increasing volatility, as investors adjust to the new environment.”

Charter warned that as Brexit negotiations proceed, “the main influence on the company could arise from movements in sterling.”

“The Board and the Manager propose to navigate this period by remaining patient, ensuring the portfolio is widely diversified and focusing on companies with proven business models and strong management,” he continued. “In their opinion, this remains the best way to deliver the Company’s long-term investment objective.”

The group announced it would award a final dividend of 17.0p, up from 16.0p the previous year.


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