Investors should be cautious on the likelihood of “increasingly discredited central bankers” being able to normalise monetary policy without causing market disruption, according to Murray International manager Bruce Stout. 
The past decade has been dominated by unprecedented ultra-loose monetary policy after the world’s central banks responded to the global financial crisis by slashing interest rates to record lows and flooding the system with liquidity through quantitative easing programmes.
The effect of this was to push bond yields down to new lows while, as the chart below shows, stock market climbed steadily and in many cases set new record highs. FE Analytics shows the MSCI World has made 101.96 per cent over the past decade (in US dollar terms) while the FTSE All Share posted a 96.09 per cent total return.
However, central banks have started to scale back on the massive stimulus packages that have been in place for the past 10 years. The Federal Reserve is already lifting interest rates and shrinking its balance sheet; the Bank of England recently increased the base rate while the European Central Bank has hinted that it will end its own easing programme.
Performance of indices over 10yrs in local currencies
Source: FE Analytics
But Stout (pictured), a senior investment manager with Aberdeen Asset Managers and manager of the £1.6bn Murray International Trust, remains sceptical that central banks will be able to accomplish this withdrawal of stimulus without ushering in a period of low equity returns and increasing volatility.
In Murray International’s annual report, the manager highlighted the dangers in assuming that monetary tightening will be an easy process: “Within the minds of increasingly discredited central bankers, theoretical justification has been the constant companion of perfunctory policy and imprudent practice for the past decade. The implicit danger of continuing such a fallacy has never been so acute.
“The reality is inescapable. No comparisons from economic history or chapters in economic text books exist that might remotely clarify, demonstrate nor describe the consequences of ‘normalising’ interest rates in a chronically, debt dependent world. 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.
“Against this backdrop, great scepticism is warranted. Investment focus will continue to emphasise strong company balance sheets and realistic profit expectations, predominately in companies operationally exposed to countries around the world with sustainable, domestic, growth dynamics.”
Turning to the individual regions that Stout’s global equity income trust is able to invest in, the manager said in the case of the US rarely has there been a new presidential term to have “promised so much, yet delivered so little”. He noted that political inertia and increasingly fractious legislative landscape meant that few of Donald Trump’s pre-election plans have come to fruition.
The US equity market – which Stout’s trust has just a 14.2 per cent allocation to – has posted double-digit gains in seven of the nine years since the end of financial crisis, thereby powering on to numerous record highs.
“It is often asked why Murray International maintains such low exposure to American equities. Widely recognised as the world's most dynamic stock market, populated by numerous innovative companies and possessing ample trading liquidity, what is there not to like? The answer is relatively simple. Insensitive to valuation, the majority of US companies prefer to buy back equity rather than pay out rising dividends,” Stout said.
Performance of index over 3yrs
Source: FE Analytics
“Such indiscipline leads to extreme prices being paid to retire stock and financially engineer company balance sheets such that earnings per share significantly outpace underlying profit growth. Is such practice really in the interest of all shareholders, especially in a market of high valuations and low bond yields? Without above average dividends, investment opportunities in America remain severely limited for Murray International.”
The trust has even less of its portfolio in the UK stock market, with just 10.4 per cent of assets invested here. The manager highlighted the strained political environment as one reason to avoid the UK, adding that the trust’s “exceptionally low portfolio exposure” to the country is unlikely to rise until the uncertainty created by Brexit is resolved.
But he also highlighted deeper fundamental reasons to explain by Murray International has historically had a low allocation to UK equities, arguing that arduous dividend pay-out commitments and aggressive competitive pressures have made the market “unattractive” for a long time.
The trust’s highest geographic exposure is to Asia Pacific ex Japan equities, which account for 24.8 per cent of the portfolio. Stout noted that countries in this part of the world posted strong capital gains and above average dividends last year, with the trust’s holdings in Indonesia and Taiwan making a particularly strong contribution to its total return.
Murray International also has 17.2 per cent in Latin America and emerging markets, its second largest equity allocation.
Stout pointed out that a “love/hate relationship” continues to exist between international investors and Latin America, down to factors such as Mexico being in the firing line of Trump’s US protectionist rhetoric.
However, he continues to see opportunities in Mexican companies such airport operator Grupo Asur and consumer products provider Femsa, while in Brazil – which is emerging from a deep recession – exposure to the likes of financial services group Banco Bradesco and fuel company Ultrapar.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
Over the past 10 years, the Murray International trust has generated a 177.69 per cent total return, which ranks it second in the IT Global Equity Income sector but is below the gain made by the FTSE World ex UK index.
The trust has ongoing charges of 0.68 per cent, is trading on a 3.4 per cent premium to net asset value and yields 4.1 per cent. It is 11 per cent geared, according to figures from the Association of Investment Companies.