Markets have had a strong start to the year following a difficult 2018 but Aberdeen Standard Investments’ Bruce Stout warns that “stampeding herd behaviour” makes the rally “hollow and unconvincing”. 
Headwinds such as tighter monetary policy, slowing global growth and the US-China trade war combined in 2018 to cause volatility to spike and equity markets to fall, especially in the final quarter of the year. It ended up being a down year (or at best flat) for most parts of the equity market.
However, stock markets across the global have been moving sharply upwards during the opening months of 2019 with the S&P 500 rising more than 15 per cent and the FTSE All Share gaining 12.5 per cent.
Performance of indices over 2019
Source: FE Analytics
Several factors have contributed to this rally, with a truce in the US-China trade spat and promises for continued loose monetary policy by the world’s central banks being two of the most obvious. Officials at the Federal Reserve now expect no rises in US interest rates this year, a sharp reversal on their thinking in 2018.
But Stout (pictured) – who runs the £1.5bn Murray International Trust – remains unconvinced that the 2019’s rally is based on genuine reasons for optimism.
“Rapidly changing US interest rate expectations bolstered investor sentiment over the month as financial markets digested the prospects for increasingly accommodative monetary policy ahead,” he noted.
“As bond yields collapsed, the ominous signs of economic fragility and rising recession risk were largely ignored amongst the frenetic euphoria of relentlessly rising asset prices.”
Stout argued that the “painful memories of last year’s fourth quarter stock market rout were exorcised by renewed central bank placation”, leading investors back to areas that had looked overvalued just months before and bore the brunt of the sell-off.
Tech stocks were at the epicentre of the fourth-quarter correction following their extended rally, with the MSCI AC World Information Technology index dropping 17.11 per cent (in US dollar terms) over the three-month period. But this has been the best performing part of the market in the first quarter of 2019, rising 18.80 per cent.
“With momentum restored to the ‘benchmark’ heavy technology sector, all previous concerns over stretched valuations inexplicably evaporated against a backdrop of stampeding herd behaviour,” the Murray International manager said.
“Seldom have such thundering hooves sounded so hollow and unconvincing.”
Q1 performance of MSCI AC World since 2009 in US dollars
Source: FE Analytics
Indeed, many asset allocators have a lacklustre outlook for the global economy. The most recent Bank of America Merrill Lynch Global Fund Manager Survey found that two-thirds of investors are bearish on both the growth and inflation outlook over the next 12 months, which is the highest level expecting secular stagnation since October 2016.
As a result, fund manager across the world appear to be positioning for this environment of secular stagnation. The survey showed that fund managers have tilted portfolios towards assets that do well when growth and interest rates fall (such as utilities) while lowering exposure to those that require higher growth and rates to perform (like banks).
Against this backdrop, Stout thinks investors need to maintain a defensive mindset and keep their eye on long-term risks to portfolios, rather than following the herd over the short term.
“The strongest quarterly performance by global equity markets to March month-end for over a decade must be viewed with healthy scepticism,” the manager said.
“Accompanied as it was by sharply lower bond yields 10 years into one of the longest business expansions on record, history would suggest decelerating corporate profits are unlikely to be supportive of such widespread optimism currently discounted in developed markets equity prices.
“Favourable interest rates and positive sentiment provide a seductive short-term cocktail for market participants but rarely render support when growth fades and profits decline. Great caution continues to be warranted and exercised.”
Stout has been a longstanding critic of the bull run that has been in place for much of the time since the global financial crisis of 2008, arguing that it has pushed asset prices to unjustifiably high levels.
Since the start of 2018 alone, the manager has warned that central banks are now the biggest threat to capitalism, that there is “virtually zero” chance of loose monetary policy being reversed without significant market disruption and that investors are showing “widespread complacency” about the end of the cycle.
Performance of trust vs sector and index over 15yrs
Source: FE Analytics
Over the past decade, Murray International has made a 185.21 per cent total return. Its cautious stance means that it has missed out on some of the gains of the bull market – its average IT Global Equity Income peer is up 242.17 per cent while the FTSE World ex UK has gained 259.39 per cent.
However, over 15 years – a period that captures the heavy losses of the 2008 crash – the trust has made a total return of 426.81 per cent and comfortably outperformed both the sector and the index.
Murray International has ongoing charges of 0.69 per cent, is trading on a 1.6 per cent premium to net asset value (NAV), yields 4.4 per cent and is 11 per cent geared, according to Association of Investment Companies figures.