The shift from export-led growth to domestic consumer demand in the region is changing the dynamics of the markets, he warns. Investors need to recognise there will be little relationship between economic growth and market returns in the future, he says.
“It is noticeable in Asia that it is much more cyclical,” he said. “People always thought growth would bail you out. Now there’s a real cyclical element to that growth.”
“There is a much more pronounced cycle of too much or too little. 10 per cent growth will not bail you out in Asia anymore.”
Stout says the increased dependency on the consumer has increased the cyclicality of the region because consumers are regulated by credit demand.
“Because consumers are not rational with credit, there is a need to control credit flows,” Stout said.
Stout says this cyclicality is evident in other parts of emerging markets, though not to the same extent. To react to this kind of environment, the manager says investors should be careful with valuations.
“You need to be careful what you pay for companies because growth is not going to bail you out,” he said. “If you pay too much, you won’t make any money out of it.”
In spite of the fact Asia and emerging markets have sold off heavily in the last 12 months, Stout sees few cheap buying opportunities out there, particularly in India where he says companies are in fact expensive.
The manager recently told FE Trustnet that it was harder to find value in equities now than it was at the height of the market in 2007.
However, he does think Latin America has fallen far enough to start to look interesting. He says he’s been adding to holdings in Brazil and Mexico over the last six months, with Mexican airport operator Aeropuertos del Sureste featuring as one of the top-10 holdings.
The MSCI Emerging Markets index has come of nearly 6 per cent in the last 12 months. The MSCI Asia index didn’t fall quite as far, dropping 1.4 per cent off its value.
However, as Stout highlighted, the MSCI Latin America index is down 17.65 per cent over the last year, though it has seen a strong rally from its March low.
Performance of indices over 1yr
Source: FE Analytics
Stout says he looks for high quality companies – ones that are managed for the shareholders – at low valuations. But he says these gems are hard to come by.
“It doesn’t often happen,” he said. “But there will always be a period when emotions get involved and that’s when value comes off. However, it’s an emotion of hope and expectation now, which has driven the market to record highs.”
Stout warns investors should not have high expectations for market returns over the short term.
“[Investors shouldn’t] have high expectations at the moment because those high expectations are not going to be met,” he said.
The trust has consistently outperformed the FTSE World ex UK index over the long term, though it has lagged slightly over the last three years.
Over the last 12 months, it has fallen sharply, losing 8.59 per cent while the index gained 8.63 per cent, according to FE Analytics, owing largely to its exposure to Brazil and other Latin American countries.
The trust has had a tough year as cyclical stocks in the developed world have outperformed.
Over the last decade, the trust made 282.43 per cent, more than doubling the returns of the index, which picked up 127.33 per cent. The IT Global Equity Income sector made 153.69 per cent over the period.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
That trust’s bottom-up style has meant that it has performed well in both rising and falling markets. It outperformed in both the bust year of 2008 and the boom year of 2012, protecting better on the downside in the former and rising further than the market in the latter.
However, the trust lagged both its peers and the index significantly in 2013, picking up just 4.14 per cent. But the manager thinks he’s invested in the right place because he says emerging markets can come back to the fore.
According to the manager, the countries that are hostage to international asset flows are not, as everything thinks, the emerging markets, but rather than the UK and US because the economies have huge deficits and can’t do anything about them because they aren’t export-led.
Murray International is trading on a wide premium of 5.8 per cent. It has a dividend yield of 4 per cent and ongoing charges of 1.08 per cent, including a performance fee.
