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I’m more bearish than ever, says Aberdeen’s Stout

23 December 2014

The star manager warns that the falling oil price, along with huge amounts of debt and high levels of complacency among investors, means the outlook for risk assets is bleak.

By Alex Paget,

Senior Reporter, FE Trustnet

Capital preservation should be investors’ main focus in the current “relentlessly hostile” market environment, according to star manager Bruce Stout, who says he will keep his very defensive portfolio heading into 2015.  

Stout, who heads up the ever-popular Murray International Investment Trust, has long been bearish on global financial markets due to high levels of debt in the system, distortions created by mass central bank intervention since the financial crisis and investor complacency about the strength of the economic recovery.  

He has therefore kept his £1.4bn closed-ended fund very defensively positioned in preparation for a falling market. However, given that the price of oil has dropped from around $100 a barrel this time last year to its current $57, he says he is even more bearish in his outlook.

“No longer confined to just fretting over the economic prospects of a world constrained by excessive debt, anaemic demand, deflationary pressures, declining real wages and negative returns on cash savings, financial markets now have to also contemplate the dislocations associated with a bitter and acrimonious battle between the conflicting interests of oil producers and oil consumers,” Stout (pictured) said.

He added: “Preservation of capital remains key in such a relentlessly hostile environment.”

According to FE Analytics, the S&P GSCI Brent Crude Spot index is down a substantial 40.53 per cent year to date, with oversupply, the shale gas revolution in the US and OPEC’s decision not to step in and manage the market all weighing heavily on the oil price.

Performance of index in 2014
  


Source: FE Analytics
 

Though a number of experts have suggested a weaker oil price will be good news for developed economies and their equity markets as it should free up disposable income in both the corporate and private sectors, Stout expects volatility to persist over the coming few months.

“The global economic backdrop experienced a shock of seismic proportions from collapsing oil prices during the month of November,” Stout said.

“Whilst economists and strategists frantically revised forecasts for global growth, government revenues and consumer spending based on significantly lower expectations of worldwide energy costs, it is somewhat premature to predict such a scenario on what has historically been a constantly unpredictable commodity.”

The manager added: “Further turbulence cannot be discounted in what remains an extremely tense and volatile situation.”


Stout has managed Murray International since June 2004, though it was originally set up way back in December 1907.

According to FE Analytics, the closed-ended fund has been the best performing portfolio in the IT Global Equity Income sector over 10 years with returns of 240.1 per cent, beating its composite benchmark – FTSE World ex UK and FTSE World UK 60/40 split – by more than 110 percentage points in the process.

Performance of trust vs sector and benchmark over 10yrs



Source: FE Analytics 

However, though the trust has beaten both its benchmark in eight of the last 10 calendar years, it’s one, three and five-year numbers look much weaker. This is due to its performance in 2013 when Stout’s defensive portfolio and a widening discount meant it returned just 4.14 per cent while the wider market was up more than 20 per cent.

It has also struggled year to date with its returns of 1.1 per cent.

That being said, the trust is as popular as ever and is trading on a 7 per cent premium to NAV, which is greater than both its one and three-year average premiums, according to the AIC.

Stout holds 85 per cent in equities, though those holdings tend to be large-cap multinational stocks which derive a significant proportion of their earnings from the emerging markets. They include British American Tobacco, Unilever Indonesia and Taiwan Semiconducter.

The rest of the portfolio is in fixed income and cash. His bond exposure is limited to emerging market debt as he holds bonds issued by the South African, Venezuelan and Indonesian governments and from corporates such as Vale, Petroleus Mexicanos and Bharti Airtel.

Murray International has gearing of 14 per cent, a dividend yield of 4.3 per cent and ongoing charges of 0.67 per cent, plus a performance fee.

Though Stout thinks the weak oil price will be a headwind for investors, Trevor Greetham – director of asset allocation at Fidelity – is far more positive on its implications.

“The dollar is strong, the oil price is falling and emerging market currencies are under pressure, yet US equity indices have been making new all-time highs,” Greetham (pictured) said.

“We see strong parallels with the disinflationary 1990s and our tactical positions in favour of US equities and against commodity sensitives have been paying off. Near term, we are only moderately overweight equities, however, as the plunge in oil could trigger credit stress. Longer term we remain bullish.”

He added: “A low oil price is a stimulus for consumers. Global growth should pick up over 2015 and there are as yet few signs of the kind of inflation that would necessitate meaningful monetary tightening.”

Greetham sees strong parallels between the current disinflationary market and that presented to investors during the 1990s, with China playing the role of Japan as a large industrial economy undergoing a structural slowdown.

He is therefore bullish on US equities and the dollar, but cautious on commodities and the emerging markets.


Performance of index during the 1990s



Source: FE Analytics 

During the 1990s, the MSCI World returned 176.44 per cent and Greetham says that investors can expect equally strong equity returns over the medium term as there is still plenty of spare capacity in the global economy, which means monetary policy will remain conducive for some time to come.

Though the collapse in the oil price has slightly spooked the manager in the near term, he is still bullish on equities.

“Our equity overweight is modest at present as we are worried that the sheer size and speed of the oil price collapse will trigger credit events in emerging market sovereigns or corporates with exposure to the energy sector.”

“Longer term we are still bullish. The low oil price is likely to trigger a pick-up in economic activity and additional liquidity in the form of an ECB quantitative easing programme,” Greetham added. 

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