In order to revive their respective economies after the global financial crisis, the likes of the US Federal Reserve and the Bank of England – and more recently the Bank of Japan and the ECB – have implemented unprecedented monetary policies such as ultra-low interest rates and vast quantitative easing programmes.
As a result of the added liquidity, prices of both bonds and equities have been driven up. According to FE Analytics, the FTSE All Share has returned 62.19 per cent over five years while the Barclays Sterling Gilts Index is up 42.76 per cent.
Performance of indices over 5yrs
Source: FE Analytics
However, with government bond yields around the world nearing historic lows while the FTSE 100 has just broken through its historic high, Stout – who has managed £1.4bn Murray International trust since June 2004 – says now is a time for investors to be very cautious.
“Having orchestrated a global collapse in sovereign bond yields through aggressive pursuit of reckless monetary policies, central banks continue to punish prudent savers to protect delinquent debtors,” Stout (pictured) said.
“Negative nominal interest rates are tantamount to theft as savers' capital is ‘confiscated’ by banks charging depositors to deposit funds. Against such a hideously disfigured economic and financial backdrop the priority for the trust remains capital preservation and dividend growth.”
Stout says the current fixed income market is totally mispriced as a result of the intervention, but he adds that the distorting effect is also negatively affecting global equity markets as well.
“Weaker economic growth and lower inflation greeted the New Year in similar style to what prevailed in 2014. Sovereign bond markets positively enthused about the diminishing prospects of higher interest rates, but such optimism was noticeably absent from equity markets,” he said.
“Downward deflationary pressure on product selling prices combined with anaemic consumer demand maintained a hostile environment for overall corporate profits.”
“In local currency terms, numerous global equity markets declined over the month, but sterling weakness against several key portfolio exposure currencies enabled positive absolute and relative performance to be secured.”
Despite Stout’s bearish tones, numerous market experts have become increasingly bullish on risk assets.
As readers will be well aware by now, the FTSE 100 recently broke through its record high of 6,930 – which was last seen during the height of the dot com bubble in December 1999 –and in an article yesterday a number of industry professionals said they were expecting further gains from equities.
Price performance of index since 30 Dec 1999
Source: FE Analytics
Rowan Dartington Signature’s Guy Stephens says that though stock markets have hit new highs, it doesn’t mean a crash is on the horizon.
“Profits and turnover growth in the US are very strong and there are signs of strength globally, most notably on our own shore where discretionary spending will be boosted by the oil price collapse,” Stephens said.
“Markets usually crash when there is a false sense of well-being and prosperity. Today’s equity markets couldn’t be further from that scenario and so that provides a cushion of comfort that there are lots of additional buyers still out there and a limited number of sellers.”
Nevertheless, several managers have echoed Stout’s negative views as many believe it is a sign of a broken market when the prices of bonds and equities – which have historically been negatively correlated – have both performed so well over recent years.
Two of which are Hamish Baillie and FE Alpha Manager Steve Russell, who run the Ruffer Investment Company.
In their most recent note to investors, the managers said the possibility of tighter monetary policy in the US will cause problems within the markets – both in perceived ‘safe’ and ‘risky’ assets.
“We have reduced our equity exposure, realigned our currency positions and locked in some of the gains in index-linked bonds through the purchase of interest rate swaptions,” the managers said.
“We remain cautious on the global economic outlook as markets remain detached from economic fundamentals and loose monetary policy has created distortions in markets that will be exposed when the rising tide of central bank induced liquidity begins to recede.”
According to FE Analytics, Stout’s Murray International trust has massively outperformed both the IT Global Equity Income sector and its composite benchmark – FTSE World ex UK and FTSE World UK 60/40 split – since he has been in charge.
The closed-ended fund has returned 318.12 per cent over that time, beating the sector and its benchmark by more than 150 percentage points in the process.
Performance of trust versus sector and composite benchmark since June 2004
Source: FE Analytics
Due to Stout’s more defensive approach to fund management, his portfolio – which is a mixture of large-cap non-cyclical equities with emerging market exposure and bonds via emerging market debt – has tended to make its money during times of market weakness.
Our data shows it was top quartile and beat its benchmark in the financial crisis years of 2007 and 2008, comfortably outperformed in the falling market of 2011 when fears over the European debt crisis intensified.
This ability to protect on the downside means shares in Murray International are highly sought after and data from the AIC shows it is currently trading on a 4 per cent premium to NAV. However, the trust – which has gearing of 14 per cent and ongoing charges excluding a performance fee of 0.67 per cent – has traded on a 10 per cent premium at times over the past 12 months.
This isn’t the first time Stout has been bearish, however, as FE Trustnet has published a number of articles in which the star manager has expressed concerns.
“Any return towards more fundamental based asset pricing is likely to expose the fragility of high hopes and expectations that have recently prevailed, thus great caution will continue to be exercised in the current hostile environment,” Stout said in December 2013.
Guy Stephens therefore says that while he has the upmost respect for market bears such as Stout, investors should sometimes take their views with a pinch of salt.
“When listening to bearish views it is important to remember that this is always an easier position to take than an overtly bullish one,” he said.
“The investors’ downside is so much less because a profit foregone is considerably less painful than a loss realised. At some point, as is the nature of markets, there will be a correction but will those same bears then push the bullish button, mission accomplished? It rarely happens.”
Stephens added: “Bears tend to remain bears and bulls tend to remain bulls, although the latter is quite a rare species in today’s environment of short-term performance measurement.”