Abrdn manager slams central banks for inflation

Bruce Stout

“Delusional” central banks have been blamed by Bruce Stout, manager of Abrdn’s £1.77 billion Murray International Trust, for stoking global inflation with a “toxic cocktail of distorted reality.”

Stout said: “Inflating expectations to the point where markets became totally dependent on such a toxic cocktail of distorted reality was probably the most dangerous ‘inflation’ of all. 

“Yet, throughout this long period of inflation, those responsible for managing ‘price stability’ were complicit in managing ‘market prices’ and, thereby, in stoking the flames of future price instability once perceptions inevitably changed.

“The recent emergence of rampant price and wage inflation leaves those Central Banks responsible for such broader inflation of the past twenty years devoid of any credibility whatsoever.

“With only limited policy options now at their disposal, the world waits to see if they tighten too much and cause recession or tighten too little and watch inflation spiral out of control.”

The Murray International Trust reported its net asset value (NAV) total return, with net income reinvested, was +3.8% for the six months to June 30, 2022, and share price total return was +9.5% reflecting a narrowing of the trust’s discount from 6.8% to 1.8%.

Murray International does not have a benchmark but this compared with a -10.5% return of the company’s reference index, the FTSE All World TR Index.

The fund looks to achieve above average dividend yield, with long term growth in dividends and capital ahead of inflation, by investing principally in global equities.

Its 10 biggest investments at June 30 were Mexico’s Aeroporto del Sureste, Taiwan Semiconductor Manufacturing, American firms Philip Morris International, AbbVie, CME Group and Broadcom Corporation, TotalEnergies of France, Unilever, Verizon Communications, and Sociedad Quimica Y Minera De Chile.

Two interim dividends of 12p were declared. “As stated previously, the board intends to maintain a progressive dividend policy given the company’s investment objective … the board currently intends to pay a dividend for 2022 of no less than the 55.0p per share dividend paid for 2021,” said the fund.

“If necessary, the board will again consider using some of the significant revenue reserves built up over prior years for occasions such as the current pandemic.

“The earnings from portfolio companies have continued to recover and, at the end of June 2022, the balance sheet revenue reserves amounted to £63.3m (June 2021: £58.2m).”

In his outlook, Stout added: “The schizophrenic nature of supposedly rational financial markets is nothing new to seasoned investors.

“History is littered with protracted periods where financial markets unreservedly ‘believe’ in something right up until the point where ‘perception’ changes and then suddenly they don’t.

“Perception becomes reality regardless of what the reality actually is. The current interpretation of inflation is reflective of such a subjective change.

“Over the past fifteen to twenty years, ‘inflation’ has been omnipresent in financial markets yet consistently viewed positively by consensus, up until now.

“Inflating liquidity through quantitative easing was welcomed by markets as a policy option to deal with economic crisis.

“Inflating government balance sheets of the Developed World from $5 trillion fifteen years ago to $35 trillion today was embraced as a necessary consequence.

“Inflating Government Bond prices to levels that produced ‘irrational’ negative bond yields was generally viewed as acceptable, despite clear concerns over financial repression.

“Inflating equity market multiples of unprofitable, cash burning companies was positively argued as evidence of superior, future growth.

“Inflating property prices to unsustainably high ratios of income affordability in all but a zero interest rate environment, was generally viewed as positive ‘wealth’ creation. 

“Inflating expectations to the point where markets became totally dependent on such a toxic cocktail of distorted reality was probably the most dangerous ‘inflation’ of all. 

“Yet, throughout this long period of inflation, those responsible for managing ‘price stability’ were complicit in managing ‘market prices’ and, thereby, in stoking the flames of future price instability once perceptions inevitably changed.

“The recent emergence of rampant price and wage inflation leaves those Central Banks responsible for such broader inflation of the past twenty years devoid of any credibility whatsoever.

“With only limited policy options now at their disposal, the world waits to see if they tighten too much and cause recession or tighten too little and watch inflation spiral out of control.

“Against such a backdrop, the investment environment is likely to remain extremely challenging. In addition to ‘traditional’ inflation of prices and wages, the Covid pandemic, war in Ukraine and climate change is prompting companies and governments to scrutinise global linkages for resilience, security and sustainability.

“The halcyon days of globalisation may well be over, suggesting a return to increasing market rigidity with less focus on just sourcing the cheapest possible price.

“The portfolio remains focused on geographical and sector diversification, real assets and quality balance sheets for an increasingly opaque outlook where financial risk remains fraught with uncertainty.”

In his report, Stout added: “Seldom have economic and financial conditions deteriorated as rapidly as those that evolved over the first six months of 2022.

“The barbaric Russian invasion of Ukraine dominated the headlines, adding additional humanitarian, economic and political challenges to a world still plagued by problems from a global pandemic.

“Continuing lockdowns, supply chain disruptions and widespread shortages combined with upward pressure on wages created a seismic shift in global inflationary dynamics.

“Central Banks belatedly began to aggressively raise interest rates, their delusional expectations for just ‘temporary’ then ‘transitory’ inflation exposed as woefully inadequate for the negative emerging environment.

“As numerous global equity and bond markets succumbed to the general liquidity squeeze, identifying pressure points of distress proved painfully straightforward.

“Growth, inflation, interest rates, corporate profits, incomes and living standards all meaningfully deteriorated in terms of being supportive of prosperity.

“Yet perhaps most corrosive of all was the tangible change in sentiment.

“What became crystal clear throughout this turbulent period was an increasingly grudging realisation that there are no easy solutions to issues such as wage inflation, war in Ukraine, wanton interest rate policy, recession risks and the cost of living crisis.

“For the first time in well over a decade, certainly as regards financial markets, such prevailing pessimism manifested itself in selling into strength rather than buying into weakness.

“Against such a backdrop, capital destruction was likely to be ubiquitous, and so it proved.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.