Abrdn manager laments ‘impotent’ central banks

Managers of Abrdn funds around the world have given their views on markets amid the volatility and index declines of 2022 as high inflation, rising interest rates and growing concerns about corporate profits and economic growth have hurt investors’ appetite for risk.

Edinburgh-based Abrdn manages and administers about £540 billion of assets around the world.

Bruce Stout, investment director of the £1.6 billion Murray International Trust, which looks to invest in a high conviction global portfolio, said: “Tough decisions lie ahead for central bank policymakers.

“With numerous global equity markets now wholly dependent on the drug of their accommodative monetary policies and repeated commitments to ‘do whatever it takes’, the central banks in the developed world must now face the ‘shocking truth’ that, in reality, their mandate is to manage inflation and not asset prices!

“For a generation of investors this realisation may prove particularly unpalatable – for the current incumbents of central banks this task may prove beyond them.

“The sheer magnitude of outstanding debt suggests a decisive defence of price stability is unlikely to materialise under the current circumstances.

“Central banks may have announced ‘commitments’ to raising interest rates, but a rise in interest rates above inflation rates (to re-establish a real interest rate) appear a pipe-dream under current circumstances.

“Against this backdrop, increasingly impotent central banks may come under intense political pressure to ‘do more’ despite the reality of being unable to ‘do much’, hence prolonging economic uncertainty and the negative consequence that unchecked inflation has on currencies, wealth and prosperity.

“The portfolio will remain defensive with widespread emphasis on real assets.”

Abby Glennie, investment director of the £600 million Abrdn UK Smaller Companies Trust, that looks to achieve long term capital growth by investment in UK quoted smaller companies, said: “Recent months have continued to be tricky for equities, especially for growth stocks.

“However, the most pleasing aspect for us is seeing the continued earnings resilience from the companies in which we are invested. Indeed, we have seen a healthy level of earnings upgrades across our holdings.

“While this is perhaps not currently being rewarded in the way we think it should be, we believe this will normalise.

“We are seeing a sharp turn in net upgrades versus downgrades across the market and are pleased to report that the portfolio’s holdings are on the right side of this metric.

“We are heading towards a tougher economic environment and continued geopolitical instability. In a slower economic environment, or a recession, investors tend to look to quality as a safe haven.

“This has not been the case so far this year, with investors dismissing quality as a factor. But we have started to see that turn in the last month.

“With interest rates rising, balance-sheet strength will become increasingly important, and investors will look to well-managed companies, with visible and resilient revenue streams, that can continue to invest in their businesses through tougher periods.

“With inflationary pressures continuing, having a strong market position which facilitates pricing power is going to be key. Equally important is a strong culture, given the challenges in attracting good employees.

“Timing the market, especially in the small and mid-cap space, can be difficult.

“While many data points show we are at extremes in terms of market moves, both in large versus small caps as well as in growth versus value, there is still a risk that markets will overshoot to the downside.

“There may need to be a turn in macroeconomic indicators, such as inflation levels or the direction of interest rates, before we see greater levels of risk tolerance.

“In our view, these are not likely to be near-term developments. Therefore, it is important to remain focused on the long term.”

Yoojeong Oh, investment director of the £480 million Abrdn Asian Income Fund, that provides investors with a total return primarily through investing in Asia Pacific securities, said:

“We expect Asian markets to remain volatile in the shorter term given the prevailing stress points of rising inflation, the war in Ukraine, monetary policy normalisation and Covid-19 resurgences.

“However, we are seeing positive signals from Chinese policymakers that could bolster market sentiment and the economic recovery in Southeast Asia continues to gain momentum as countries like Singapore and Thailand reopen after the removal of restrictions.

“Asian markets now clearly face macroeconomic and geopolitical pressures, but we believe that there has not been a significant deterioration of fundamentals across the region.

“Some of the companies we hold have warned about the challenges posed by higher input costs and rising interest rates.

“However, encouragingly, the earnings of many of our holdings have either met or exceeded our expectations in the latest results reporting season.

“Also, volatility in certain markets has created opportunities for investors like us who are there for the long run, both through identifying new ideas and increasing our weighting to quality long-term holdings that can provide a sustainable income stream to investors.”

Ben Ritchie, investment manager of the £450 million Dunedin Income Growth Investment Trust, that looks to select a diverse portfolio of high-quality UK and overseas companies to deliver a resilient quarterly income and long-term capital growth potential, said: “While we retain the cautious outlook that we have had for some time, we are increasingly attracted by the potential returns on offer from a number of very strong businesses that are now trading on valuations they have only traded on during periods of extreme distress during the previous 15 years.

“During the year so far our first priority has been to add capital to the holdings we already have within our portfolio.

“But we are increasingly looking at a number of compelling longer-term opportunities that we currently don’t hold.

“Overall we will continue to keep a balance to our positioning, giving ourselves the potential to perform in a range of market environments.

“Our attention remains on seeking to protect capital, but we will be increasingly looking to participate in opportunities where share prices in good companies with attractive long-term prospects have been oversold and at the same time focus on the companies that meet our sustainable and responsible investing criteria.”

Kristy Fong, investment director of the £410 million Aberdeen New India Investment Trust, that looks to achieve long-term capital appreciation by investing in companies which are incorporated in India or which derive significant revenue or profit from India, said: “Looking ahead, we expect volatility to remain in the near term, and India is not immune from the turmoil.

“Policymakers have the unenviable task of managing commodity-led inflation without compromising the country’s economic recovery from the Covid-19 crisis.

“India’s external balances remain vulnerable to higher energy prices, given that it is a large net importer of oil, but policymakers have already started taking steps to try and bring the situation under control.

“We are confident that the portfolio holdings’ pricing power and ability to sustain margins provide a measure of comfort.

“Over the longer term, India’s growth story remains intact, supported by a pro-growth budget for FY23 as infrastructure, housing and capital expenditure gradually coming back.

“India is also expected to deliver one of the highest earnings growth in the region this year.

“We remain highly selective in our portfolio positioning, preferring high-quality companies with robust balance sheets and led by good management that we believe helps them weather storms better than most.

“It is our belief that these companies should deliver sustainable returns over time.”

Iain Pyle, investment director of the £85 million Shires Income investment trust, that looks to invest in high-quality investments for a high, regular income, said: “After an already challenging year, market sentiment has taken a clearly more bearish turn in June.

“The combination of inflationary pressures on many companies and the resultant acceleration of rate rises from central banks has left investors concerned that we will be pushed into a recession.

“While many more recessions have been predicted than have actually occurred, there is an increasing chance of negative economic growth in our view.

“The signs are that consumers are turning more cautious and that companies, who are still reporting robust earnings, are seeing the outlook deteriorate.

“While that scenario seems difficult for investors, there are still reasons to be constructive.

“Firstly, valuations are already pricing in a fair amount of pain in many areas of the market, creating some opportunities for those willing to invest long term and ride through any trouble.

“Secondly, balance sheets are in good shape, with consumers and corporates having saved money in recent years. We believe that means we shouldn’t see too much distress even as growth slows, although we will need to be aware of the rising cost of debt and the pressure this can put on earnings.

“When thinking about how to approach a potential (and it is still only potential!) recession, balance sheet strength is particularly important as it will allow companies to continue to pay dividends and allow us to stay invested for the longer term.

“In terms of portfolio construction, we are looking for stocks in two areas to deal with a period of high inflation and slowing growth.

“Firstly, those that are beneficiaries of inflation and where valuations are already low.

“Banks, which benefit from rising rates, and energy stocks, where cashflows are strong and valuations are low, fit in this category, along with real estate which tends to hold real value.

“Secondly, we are looking for high quality companies, with strong market positions in industries that will likely prove defensive, such as healthcare.”