‘We’re not at the peak of fear yet,’ warns Murray International’s Stout

The investment fund manager says investors haven’t started selling “indiscriminately”.

Investors could have a lot longer to wait before the market hits the “peak of fear”, according to veteran investment trust fund manager Bruce Stout, who said this year’s falls have been “rational” rather than “blind”.

This year, markets fell due to rising inflation and interest rates, war in Eastern Europe and a general slowdown in the global economy.

Add to that the recent rise of right-wing politics and the abandonment of globalization, and the world looks more fractured than it has in decades.

This concoction led to a bad year for the markets, with the FTSE All World down 9.1% while the average IT Global Equity Income Trust lost 9.9%. Still, Stout’s Murray International Trust has gained 5.7% in 2022 so far.

Confidence Total Return vs. Sector and YTD Benchmark

Source: FE Analytics

Despite the market falling, there could be much worse to come, as the manager said we are still far from the “fear peak” that usually signals the market bottoming out and the start of a recovery.

“As long as we have a conversation in a rational way, I would say we haven’t reached the peak of fear yet. When you get to the real stress points, people don’t want to talk about it. People don’t want to look at their portfolios or their valuations,” he said.

Stout said the last two months of 2008, when the market posted back-to-back double-digit losses, was a good example of “blind selling.”

“We haven’t had any of that yet. A big chunk of sales is now for tech names in the US, which are down 60-70%. It’s not relevant. Look where they were. I don’t know why the valuations were so high, but they could still be 100% or 200% overpriced because there may not really be any bargains out there,” he said. .

“I don’t think this is the peak of fear. There is no blind selling. There is rational selling. You have to wait for the month to come where it feels really awful and you think we shouldn’t do that.

One way investors can tell if markets are overreacting is through the bond market, which Stout says might be a better indicator of sentiment than stocks. If people are rushing to traditional safe havens such as the US dollar or Treasuries, that’s a sign of a spike in fear.

The last time investors acted irrationally like this was in March 2020 when the Covid pandemic shocked the markets.

Stout said it was much harder to judge because there were no tangible signs of improvement, but rather hope and a “leap of faith” that the pandemic would end.

“Covid was the hardest job we’ve ever done because the others were tangible. At least the property collapsed during the global financial crash,” he said.

Meanwhile, Murray International had a large holding in emerging market debt, which held up well in March and April, but the manager reduced exposure during this period to add to US growth companies which fell so low that ‘they were yielding as much as 7% – a great opportunity for the income portfolio.

“When we did it was horrible. Your instinct is to preserve capital. The bonds we had weren’t going down, so the safest thing to do would have been to hold them, but you have to sell and get into what fell,” Stout said.

That opportunity hasn’t presented itself this time around, but the manager is looking at high-quality industrial stocks that have fallen but will be present in the next cycle.

Hugo Ure, co-manager of the Troy Income & Growth trust, said he was unsure if the market had reached its peak of fear, but things could get worse.

“I don’t know. I don’t think we’d try to call it maximum fear. There’s a long way to go before that feeling of revulsion kicks in. People are always trying to figure out what’s cheap – they haven’t banned the stock market altogether,” he said.

Ure added that things “felt much worse” during the financial crisis and the height of the pandemic, but said there was no guarantee the sentiment would get any worse now.

“Things can get worse. Whether they are or whether we get bailed out by central bankers cutting rates, I don’t know. It may turn out to be maximum fear for this part of the cycle,” he said.

Carol N. Valencia