12 Murray International Trust PLC
Background
“Sir Isaac Newton tells us why,
an apple falls down from the sky,
And from this fact it’s very plain,
all other objects do the same,
A bolt, a bar, a brick, a cup,
invariably fall down, not up.…..!”
Defying gravity best describes the behaviour of global
equity markets over the past twelve months. Seemingly no
amount of economic despair, political discord, policy
disharmony, geopolitical disunity nor rational doubt was
enough to dampen the animal spirits of unquestioning
market exuberance. Confronted with enough economic
evidence to chill the spine of even the most optimistic
investor, positive equity market returns bore no reflection
of underlying ubiquitous strife. “Gravitational” forces
associated with higher interest rates pulled down
disposable incomes, inflation rates, house prices and
overall economic activity. The weight of increasing
protectionism and escalating geopolitical tensions
constrained global trade and investment. Consumer
credit creaked under pressure from increasing financing
costs. Government balance sheets, bloated over decades
by the grotesque largesse of printed money, buckled
under similar dynamics. Gravity also finally caught up with
fiscal spending, cutting budgets as future funding costs
became prohibitive. Confronted by such realism it might
appear incredible for global equity markets to anticipate
amelioration amongst such angst. Yet against any rational
expectations that is exactly what happened. Towards the
year end, markets hastily equated positive policy
statements suggesting an end to monetary tightening
with unquestioning acceptance of imminent interest rate
reductions. Surging global bond and equity markets
reflected this temporary shift in sentiment, but such
simplistic causational logic implies “laws of inevitable
consequences” that need not materialise in practice.
Deep down, do global equity markets really believe
speculative excesses accumulated over decades can be
painlessly erased by simply reigniting credit growth? Such
naivety beggars belief. Superficially, declining inflationary
trends witnessed throughout the Developed World in 2023
undoubtably generated widespread complacency.
Financial market participants were desperate to believe
policymakers had successfully conquered inflation. Yet
scratching below the surface revealed a seismic shift in
global protectionism, wage expectations, immobility of
labour, debt-servicing dynamics plus a host of additional
rigidities to effective free market pricing. Short-term
respite in food and energy costs temporarily tempered
the tourniquet on consumer purchasing power but no
evidence emerged of a sustainable end to pricing
pressures. For an investment generation nurtured on
global disinflation for the past twenty years, accepting the
inevitable end to such favourable circumstances was
never going to be easy. Such misplaced market euphoria
towards the year end was testimony to that.
Decelerating economic activity dominated most global
economies over the period. Personal consumption bore
the brunt of the higher interest rate environment.
Dwindling savings, combined with soaring mortgage and
debt costs dramatically reduced disposable incomes.
Economic growth was constantly constrained, although
outright contractions (recessions) were miraculously
avoided by remarkable resilience in labour markets.
“Hoarding” labour until painful retention costs become too
acute is nothing new in economic history. When the
painful contraction begins, the dramatic rise in
redundancies is invariably more pronounced. Should the
events of previous business cycles repeat themselves,
then higher unemployment throughout 2024 looks
inevitable. Bond markets generally endured a torrid twelve
months against a backdrop of constantly rising interest
rates. On course for a third consecutive year of negative
returns, until the fourth quarter rally restored some
semblance of respectability, an obvious irony escaped
most investors’ attention. Mountainous, unsustainable debt
liabilities in the Developed World suggest neither inflation
nor interest rates will continue as the predominant
influence over future bond market pricing. Absent their
buyer of last resort, (Governments) – solely culpable in
distorting bond yields over the past twenty years – the
price of future debt (bonds) becomes hostage to
unforgiving market forces. Enormous excess supply and
deteriorating credit-worthiness of issuers is a toxic,
unpalatable cocktail for such historically “low risk” assets to
swallow. Like it or not, deteriorating asset quality remains
the single most unquantifiable “skeleton” still lurking in the
cupboard of recent interest rate tightening. Uncovering
such bones of bankrupt businesses suggests additional
grim realities for markets to digest.
As the Western World waits for “Godot”, financial
fundamentals elsewhere paint a very different picture.
Unburdened by aging demographics, excessive systemic
debt and free to benefit from prudent, long-term orthodox
economics, the Developing World evolves without its
delusions and the psychological baggage of false
entitlement. Most of all, from an investment perspective,
modest expectations are achievable. Lessons learned
throughout Asia and Latin America over many decades
suggest a healthy aversion to banking risk, credit risk,
Investment Mana
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