16 Murray International Trust PLC
Global Review
The deeply distorted business backdrop that greeted the
onset of 2022 concealed the chasm of macroeconomic
honesty and integrity that exists throughout the world. The
transparent monetary orthodoxy prevailing in Developing
economies versus the opaque policy unorthodoxy
complicit with persistent profligacy in the so-called
Developed World. Unrepentantly pursuing interest-rate
policy inertia to cover up the cracks of unsustainable debt
dependency, unjustified prosperity entitlement and
widespread structural demise, a rude awakening
belatedly descended on policymakers in the Developed
World. Inflation was alive, well and most definitely
unwelcome to Wall Street and those with their heads
firmly in the sand.
What transpired in the United States exemplified yet again
the financial pain that accompanies disrobing of delusions.
The largest annual upward move in the US Federal
Reserve’s benchmark lending rate since 1973 caused US
mortgage rates to soar. Widespread bond market
weakness proved an inevitable consequence. Both
domestic equity and bond markets sharply declined, the
first such ‘in tandem’ occurrence for fifty years.
Sanctuaries of capital preservation were unsurprisingly
few and far between. The plunge caused significant value
destruction to technology titans of the past decade, the
new economy stocks of the Covid lockdowns,
cryptocurrencies and numerous other unproven business
concepts that so often characterise the final stages of a
speculative bull market. Yet most events that defined 2022
in the United States came straight out of a macro-
economic textbook! Unfortunately for bruised and
battered investors the logical progression from here
makes uncomfortable reading. Higher bond yields, a
collapse in money supply, tightening affordability in the
housing market and contracting manufacturing all point
to at best recession, at worst, stagflation. Longer-term,
financial markets still have many problems to digest.
Corporate earnings expectations remain totally detached
from reality; asset quality is likely to deteriorate as
economic growth contracts; poor risk management, over-
optimism and incompetence has led to the usual gross
mis-allocation of capital into non-profitable, liquidity
dependent businesses unlikely to survive in a higher
interest rate environment. Irresponsible Federal Reserve
policy directed at managing asset prices rather than price
stability has created an enormous debt legacy needing to
be addressed; in doing so, upward pressure on bond yields
may constrain growth and prosperity beyond the confines
of any normal business cycle. With US equity and bond
markets increasingly expecting policymakers to once
again capitulate and do “whatever it takes” to appease
short-term interests, great scope for disappointment
exists in the medium-term outlook for US financial assets.
The UK and European financial markets faced similar
issues related to belatedly recognising resurgent inflation
and its accompanying consequences. Desperately
detached from economic realities, The Bank of England
and European Central Bank proved powerless to maintain
their veneer of credibility. Frantically hiking interest rates
retrospectively in response to spiralling prices fooled no
one – bond markets sold off sharply and equities struggled
to preserve capital. Whilst the narrow UK FTSE 100 ended
in positive territory, broader indices of UK companies
endured double-digit declines. The perceived “defensive”
nature of the UK equity market primarily equates to
significant index presence of Consumer Staples and
Healthcare companies and their dividend paying culture.
Yet globally such opportunities can increasingly be found
elsewhere, often with higher growth characteristics and
superior dividend potential. Historically the UK’s energy
and commodity sectors that remain over-represented in
the market have tended not to provide robust downside
protection when recession strikes. Consequently the
current low portfolio weighting to the UK is unlikely to
change. Perhaps somewhat paradoxically, given the
ongoing war in Ukraine and evidence of increasingly
strained EU political dynamics, the investment outlook for
portfolio holdings in Europe is arguably more transparent.
European Industrials such as Epiroc, Atlas Copco, Siemens
and BE Semiconductor endured an extremely tough 2022.
Constant downward earnings revisions, contracting equity
price-earnings multiples and cautious trading statements
prevailed throughout. But, at current valuations, future
risk-reward prospects are undoubtably compelling,
especially with sentiment being ubiquitously negative.
Shunned by global investors in a world until recently
infatuated with US Technology stocks, Europe offers
intriguing opportunities against the current backdrop of
higher interest rates and uncertainty.
Unburdened by systemic vulnerability and unfettered by
secular, short-term interests, policy directives in the
Developing World remained appropriate and prudent. All
too familiar with how high inflation disproportionally
decimates the purchasing power of low-income earners,
policymakers throughout Asia and Latin America had
anticipated the majority of 2022 developments. Significant
proactive interest rate hikes in 2021 prepared the
economic landscape for escalating inflationary pressures
witnessed in 2022, consequently such foresight had prices
controlled and declining by period end. Having anchored
expectations, bond markets remained sanguine over
Investment Mana
er’s Review
Continued