12 Murray International Trust PLC
Background
The subjective “science” synonymous with financial
markets attracts many diverse practitioners. Devout
disciples of data worship statistics as the instigator of
relative price moves. Followers of fashion adopt a more
footloose approach, favouring concepts over cash-flows,
perceptions over profits. At the extremes, the apostles of
animal spirits put their faith in “the invisible hand”, a guiding
force anatomically attributed to avarice and anxiety, but
emotionally expressed as greed and fear. For the most
part, such financial ideologies co-exist without much
friction or fissure. But not always. Periodically, the
contemporary dominating dogma becomes
dysfunctional as economic conditions change, the
inevitable consequences invariably being asset-value
dislocations and wealth destruction. Spurious justifications
of excessive valuation repeatedly precede such events,
painful deflation of mispriced assets the recurring
aftermath. The seismic shift in the global economic
landscape over the past twelve months represented the
most serious challenge to prevailing consensus market
doctrine for decades.
At the root was a once familiar foe - inflation. Supposedly
extinct in a world of free-flowing capital, labour and trade,
the silent assassin of wealth returned with a vengeance.
Initially ignored as transitory, then latterly dismissed as
temporary; by year end widespread price rises were
attracting the attention of everyone except the most
foolhardy. The rapid pace of inflation’s resurgence was
relentless, radically “warming” the economic climate
across the globe. Ironically, as if to emphasise the point,
infection mutations related to the pandemic were
perhaps the only cold constant throughout. Coexisting
with the continuing battle against Covid-19, practically
every economy registered a meaningful rebound in
growth and inflation, although rates of expansion proved
extremely erratic, varying enormously between countries
and continents. Vast differences emerged between the
Developed and the Developing Worlds, not solely
attributable to vaccination rates.
Unfettered expansion of fiscal and monetary stimulus in
the Developed World unleashed unwelcome
consequences. Budget deficits ballooned, pent-up
consumer demand overwhelmingly outstripped supply,
and unlimited financing inflated numerous asset bubbles
in different sectors of economies. Equity market valuations
surpassed previous peaks, property prices soared to the
highest multiple of household income on record,
commodity prices skyrocketed upwards and speculative
“investment” in new concepts and conjectures exceeded
all levels of rational reasoning.
At the core of such emphatic exhilaration was, yet again,
irresponsible Central Bankers. Craving popularity over
prudence, the purported guardians of the greater good
constantly stoked the fires of future financial instability by
adhering to inappropriate monetary stimulus way beyond
the boundaries of stated purpose and seemingly oblivious
to the inflationary impacts of such actions. Pandering to
equity markets whilst simultaneously enforcing financial
repression on bonds should have no place in any self-
respecting, independent Central Bank mandate but
unfortunately this has been endemic throughout the
Developed World in recent times.
Conversely, the Developing World generally favoured
constraint in negotiating the untrodden path from the
Covid pandemic. Across Asia and Emerging Markets,
policymakers mitigated business interruptions and social
costs whilst simultaneously implementing prudent policy
responses. Interest rates were raised in anticipation of
future inflationary pressures, and pro-growth initiatives
intensified without exploitation of public financing. Caution
prevailed and careful discretion was exercised with
prosperity simply postponed for the future. A combination
of vaccine shortages, selective reinstated lockdowns,
mandated isolations and generally higher interest rates
were always going to restrain growth in various
developing market countries, but only relatively. The
Chinese economy still expanded over 8% in 2021, with
Taiwan not far behind growing 6%. More importantly,
fiscal respectability was maintained throughout, with local
interest rates free to accurately price risk for both lenders
and borrowers alike. Against this backdrop, corporate
profit recoveries were more subdued than those
experienced in the Developed World, but the delayed
resurgence in earnings and dividends should ultimately
mean they prove to be longer lasting and of higher quality.
Absent of the excesses which prevail in Developed World
asset classes, the risk reward in Asian and Emerging equity
markets remains very compelling.
For a year that began offering a plethora of positive
potential, promising new vaccines, unprecedented
stimulus, widespread economic recovery and contained
inflation, by the end of the period the financial backdrop
had markedly changed. A highly contagious Covid variant,
increasing upward pressure on interest rates, restrained
fiscal spending initiatives and inflation at multi-decade
highs had conspired to sever expectations from reality.
More ominously so did the performance of bond and
equity markets, the former beginning to discount tougher
times ahead, the latter essentially ignoring escalating
inflationary pressures and the consequences that
invariably follow. Unfortunately such naivety is unlikely
to last.
Investment Mana
er’s Review