Bruce Stout: nothing is permanent except change

It’s almost 50 years since my generation left school in the summer of “75”.

Armed with aspirations that could only be fulfilled by becoming the next Denis Law or Carlos Santana, scant attention was given to prevailing economic and political circumstances.

Blissfully oblivious to stagnating UK growth and inflation running above 24%, good engineering jobs were still plentiful in a Scottish economy yet to be ravaged by the de-industrialisation which would ensue by the end of that decade. Political influence remained the property of press barons, the spectrum of which seldom extended too far left or right.

Moderation generally proved the popular norm. Consumer consumption was dependant on real wages, mortgage borrowing on prudent multiples of salary and “hire purchase” was unquestionably the most extravagant extreme by which any elevated “wants over needs” were satisfied. Central banks remained unobtrusively buried in the bowels of government bureaucracy, and fiscal largesse extended no further than sporadic temporary deficits during recessions.

Historical economic catastrophes, feared by prevailing orthodoxy, were seared into the psyche of policymakers. Printing money, inflating asset bubbles and devaluing credit worthiness were off limits for progressive global economies where fiscal and economic morality predominately prevailed. On refection, halcyon days indeed, which over the intervening years would become no more than dim and distant memories!

Irrefutably, the winds of change have left their mark on the UK economy and beyond. What remains debatable is whether for better or for worse. Among countless changes in the economic and investment landscape, certain themes stand apart. Protectionism, so prevalent in decades past, temporarily abated to yield dis-inflationary and productivity benefits as deepening globalisation promised greater market efficiencies.

Yet recent geopolitical polarisation suggests a future with increasing obstacles to capital and labour mobility. Current trends of onshoring, at considerable extra cost, emphasise security of supply over cheapness of supply. The extra price to be paid will inevitably be inflationary. Similarly, technological and manufacturing prowess, so long the domain of the developed world looks set to continue its migration to developing nations. 

Within a UK context this feels particularly galling for a nation with such a rich industrial heritage. Of the 20 British car manufacturers exhibiting at the 1975 motor show, not one remains as a domestic entity. As for globally, only the acronyms survive for UK-based industrial giants such as GEC and ICI. The direct investment consequences are clearly evident. The demise of wealth-creating opportunities in numerous developed countries, combined with ageing demographics, suggests declining real living standards will continue into the future.

Yet, the inevitable transfer of industrialisation from West to East presents only half the story. Economic theory clearly promotes the positives from “absolute” and “comparative” advantage. Be it shipbuilding in South Korea, software in India or electronics in Taiwan, such centres of excellence should be embraced by true advocates of global prosperity.

Arguably where the West went wrong was trying to preserve the un-preservable. When the pain of economic adjustment became too acute, a seismic shift in monetary attitudes ultimately led to irrevocable structural decline. 

For the past four decades, debt became the popular panacea for all economic woes. Debt layered upon debt, the modus operandi for the Western world. Numerous market manias, panics and crashes would subsequently always be bailed out by central banks, many garnering almost celebrity status from financial markets intoxicated by the constant liquidity drug. Cumulating in the grotesque practice of printing money during 2008’s global financial crisis and thereafter, the accumulated debt on government, household and consumer balance sheets now represents the greatest threat to systemic financial stability for those nations worst affected.

For our generation, who believed money was “made round to go round and made flat to pile up”, the debt-inspired monetary policy debasement within a lifetime is beyond the realms of rational comprehension.   

The legacy from such actions present investment consequences that must be considered carefully when allocating future capital. With Western central banks now discredited for creating the monetary sham that quantitative easing always was, there is no longer a buyer of last resort for bonds. A return to “real yields”, where bond investors demand risk premiums above inflation rates, is a realistic possibility. If so, most bond prices have yet to reflect the higher credit default risk and inflation volatility that typically accompanies rate hikes and rising protectionism.

Plus politically, systemic decay is arguably even more pronounced. Boldened with anonymity through the sewers of social media, political populism has plunged democratic debate to depths where distrust, denial and delusion threaten the very core of democracy itself. 

With close to 40% of the world’s population voting in elections this year, the legitimacy of outcomes will be scrutinised like never before. Global financial markets may need strong stomachs to negotiate the months ahead, but as always attractive investment opportunities will arise.

They always do. With greater depth and diversification throughout global equity markets than ever before, the investment landscape provides numerous options to reduce risk and potentially increase returns unimaginable to would-be-investors 50 years ago. Age and experience acknowledges that naive aspirations are seldom fulfilled, but thankfully the investment merry-go-round merely enters another cycle. So let the music play…

Bruce Stout, who has managed Murray International Ord (LSE:MYI) since 2004 will be retiring from fund management this month. The baton will be passed to co-managers Martin Connaghan and Samantha Fitzpatrick. The duo have worked with Stout for more than two decades.

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