When I last interviewed Bruce Stout (in June last year) I was treated to an hour of almost relentless misery. Bruce saw a lost decade ahead of us. One of “very low interest rates, very low growth, very poor profit growth, very poor dividend growth”.
He isn’t feeling much more positive this time. We can’t grow now, he says, because we have effectively already borrowed a decade of growth from the future. The growth the US saw from 2000-2010 wasn’t real. It was based entirely on consumption and debt. Now those agents of growth are “finished”, something that means we are still only at the beginning of a “long protracted slowdown”.
People expect the economy to grow at over 2% forever, simply because it has for the last few decades – but it can’t. Of course, that doesn’t mean there will be no growth anywhere. “The other thing that it is so difficult for people to understand is that, when you get a shift in wealth from one area to another, it always involves the ascendency of one society and the fall of another. It’s an extremely prosperous period for one and a desperate time for the other.” Right now, America is in the latter group.
Investors just don’t get it
There is the same kind of comprehension problem in the markets. Expectations are shaped by the period in which you’re brought up and often “extremely distorted” as a result. So most market participants still think the US stockmarket should return 6%-10% a year in real returns. It did do that for the 20-odd years between 1980 and 2000, but those kinds of returns aren’t actually normal. Somewhere in the world there will be a market delivering 10% a year. But it is unlikely to be in the West.
Might part of the problem be that we have just lived through two historical anomalies, I ask? The first is one of long-term economic growth. Pre-industrial revolution, the British economy barely grew for hundreds of years, so you could say that it is the last 200-odd years that have been the odd ones out. Add the unusual stockmarket performance of the 1980-2000 period (which most people still consider to be the default level) and it is surely no wonder that most people are a bit confused by the no-growth, no-gains world we find ourselves in.
The recession that never ended
Bruce has little sympathy for confusion. He reckons it is time everyone got real. He’s bored of hearing people talking about normal recoveries and totally fed up with the idea of a double-dip recession. “We have never been out of recession, so how can you avoid a double-dip recession? A recession is a statistical thing. Statistics can tell you anything you like. If you’ve got your head in the oven and your feet in the fridge, statistically your average temperature is fine, but you are dead. So if you’ve got unemployment of 8% and the biggest squeeze on discretionary spending since the 1970s, then you’re in recession.”
Is there any way out? There isn’t, says Bruce: “just accept it for what it is”. As long as people are still going on about “policy options” it’s clear that there is still a denial of the reality. “People deny and deny and deny until the truth is right in front of their face and they might still deny even then.” But “until you get rid of denial you can’t move forward”. The good news is that people are slowly stopping their nonsense talk about normal recoveries and beginning to see that there is very little we can do.
Another “crumb of comfort” in terms of the markets beginning to get it comes from the US Treasuries market. The fact that there was such a massive rally in Treasury bonds after the downgrade of US debt tells you that the market is not focusing on the supply of bonds, nor on the quality of the bonds. Instead, it is “only focusing on the no-growth scenario” – the one Bruce thinks we are getting. This is not to say that there isn’t a quality problem with US debt (it is out of control). It’s just to say that the fact that yields went down, not up, shows that “the market still believes that the financial structure can withstand the debt crisis”. Bruce believes this too.
All is not lost
However, just because our countries are doomed to at least a decade of low growth doesn’t mean all is lost. “What if these economies are populated by companies that get all their business somewhere else? That’s interesting, because we know that… when the world stopped in the fourth quarter of 2008 it had no impact whatsoever on telephony in Taiwan, cigarettes in Brazil or soap detergent in Indonesia.” The stock prices of the companies delivering these various services got hammered, but “the business models continued to deliver”.
It is very probable that America will grow at 1% a year between now and 2021. But what impact will that have on the profits of temporary power provider Aggreko, or oil services firms such as Wood Group or Weir? “Very little.” And if the British bond market has got things right with a ten-year yield of around 2% and you can get a 5% yield plus double-digit dividend growth, “how attractive does it make that”?
The point is that a low-growth environment in the West is actually “very positive for equity investment”. It takes the pressure off commodities, which means monetary tightening can end in developing markets. That leaves the populations of those countries with real income growth and the means to consume. And there are a “bunch of companies all round the world that are going to feed these markets with products, be they cheese or Coca Cola”. These are the companies in which Bruce invests.
The importance of faith
I ask Bruce what he would do if he ran the world as a benign dictator. He says he “wouldn’t have a clue”. I doubt that. So he says that the key thing now and always is to maintain faith in credit. We can’t have countries walking away from debt because that causes “financial chaos” and Bruce is “not in favour of chaos”. “So what you have to do is to make sure that you emphasise all the time that you will honour the debt… they say: you lose belief, you lose control.” That’s vital in Britain, given that if you add in everything “our debt-to-GDP ratio is 380%”. So there has to be a firm belief that “if you own a British bond at some point you will get paid back”. Right now there is.
How could you create that belief in Europe? Tricky, but Bruce is convinced that there is no way “the Germans want to collapse the euro”, for the simple reason that “if they are not pegged to a weak currency, their export sector gets wiped out” (for more on this, see my blog post: Why Germany will never leave the eurozone). However, how they keep it going and what they do with Greece is as much a mystery to Bruce as to the rest of us.
Nationalise the banks
On the plus side, Bruce does have dictator-like thoughts on the banks – thoughts that make me think he’d actually be a pretty good dictator whatever he might think. So what would he do with the banking system? “I’d nationalise it. I would then get a dustbin and put every scrap of non-performing rubbish in the dustbin and leave it there for five years. Then, when you go and look in it in five years’ time, you will find you’ve got some non-performers that are doing quite nicely.”
The key problem with the banks, as Bruce sees it, is that the people running the banks today are often the people who “wrecked them”. So the staff are working for people who impoverished them (huge numbers of bank employees had their savings wiped out as share prices fell). “Would you take instructions from somebody like that?” Only nationalisation would remove that problem, along with the bad debt problem.
Bruce’s approach would also mean that we could divide retail and investment banking entirely and end up with civil servants running the banking system – which is as it should be, he says. Don’t let anyone tell you that you have to have ludicrously highly paid private-sector people running banks or you won’t get good people who can design innovative products. “Innovative products have destroyed the banking system three times in my short life.” It is, I think, a fair point.
Who is Bruce Stout?
Bruce Stout is a senior investment manager within the global equities team at Aberdeen Asset Management. He joined Aberdeen in 2000 following the takeover of Murray Johnstone, where he held the position of investment manager for their emerging-markets team.
Bruce worked for Murray Johnstone for more than 14 years following his graduation from Strathclyde University with a BA in economics. He manages the £971m, award-winning Murray International investment trust (LSE: MYI), which is up 68.4% over the past five years, against 10.2% for its benchmark (a composite of the FTSE World UK and FTSE World ex-UK indices).
Collins Stewart rates it a ‘buy’. It “has the best long-term performance record of any closed or open-ended global fund based in the UK; the manager’s macro-economic views have proved prophetic and these have been a key driver. Notably, equity gearing is now at its highest level for ten years – this reflects the valuation of the underlying portfolio relative to the rest of the market and bonds. The portfolio is extremely defensively positioned with a focus on high-quality, well-managed companies that can deliver sustainable growth in earnings and dividends.”