Conviction amid complexity

Financial markets have a lot to digest. Bond yields have risen materially, and borrowing costs are on the rise. There is an ongoing energy crisis, with geopolitical tensions becoming the rule rather than the exception. The build-out of AI infrastructure brings both opportunities and risks but is unquestionably a disruptive force. Inevitably, there are implications for companies and their share prices.

These risks do not necessarily imply a difficult time for stock markets. However, it may mean that there is a rotation in market leadership and a shift in the opportunity set for investors. The Murray International Trust portfolio is moving to accommodate a changing environment. 

The AI problem

AI has been a powerful force in stock markets over the past 12 months. Stocks seen as AI winners have rallied as their earnings have moved higher, while support has drained away from companies seen as AI losers, even if that weakness hasn’t yet entirely been reflected in earnings. However, we are seeing a change in the market’s attitude to the sector. 

Sustained share price appreciation reduced prospective returns and compressed dividend yields to levels that raised questions around the suitable scale of the exposure for the investment objective, leading us to reduce exposure selectively. We have retained some exposure – this remains an important force in the global economy – but it is very selective.

We are not the only investors reappraising the sector. The focus on a single area of growth had become intense, and the past few months have shown the fragility of that trade. While the recent results showed that demand for areas such as semiconductors and memory remains strong, the indifference of investors suggests that much of the good news may already be in the price. Broadcom’s numbers, for example, were very strong, with an 86% increase in revenues year on year . Yet the share price dropped in the immediate aftermath of its update. It is a reminder that a good business can be a bad investment if the price is wrong. Expectations for growth are now extremely high, and investors need to proceed with caution.

The Middle East

The conflict in the Middle East appears increasingly entrenched. Geopolitical tensions have increased energy market volatility, with an impact on inflation, interest rates and borrowing costs. Government bond yields have been rising, and economists increasingly expect them to remain high . 

This has implications for AI spending. Companies have been raising debt to fund capital spending, and if that debt becomes more expensive, the economic calculations change. Higher inflation and interest rates also have a direct effect on the consumer and weigh on household budgets. It is easy to forget that major economies such as the US, UK and much of Western Europe are still heavily dependent on consumption as a support for economic growth. 

Many companies will be exposed to this, either because their input costs are increasing, or their customers have less money to spend. It may exert a downward pressure on economic activity, which will eventually be felt in stock market pricing.

Geopolitics is likely to remain a disruptive force even if the Middle East crisis is resolved. Tariffs are still a problem, while midterm elections in the US, trade tensions and broader geopolitical developments all have the potential to increase market volatility and affect investor sentiment.

These are frustrating and unpredictable times. Markets are likely to remain noisy.

What do we have on our side?

Our aim is to ensure that we are prepared for that volatility and to insulate our shareholders as far as possible. We have a range of tools in our armoury. Diversification is a friend in this type of environment. Holding a range of businesses tends to be a good source of portfolio stability during difficult periods with unpredictable risks. The recent earnings season suggested a broadening out of earnings momentum . We are ensuring that Murray International Trust is exposed to a range of growth drivers.

We have also moved into higher yielding opportunities more recently. Income can provide an important source of stability during uncertain periods, and we have continued to seek out companies capable of sustaining and growing their dividends. This includes companies such as insurer Legal & General. It’s not exciting, but it can be a beneficiary of higher interest rates and bond yields. US-based pharmaceutical giant Pfizer is another recent addition to the portfolio. It is reshaping its business and investing in new growth areas such as oncology and obesity. 

Alongside existing holdings such as Johnson & Johnson, AbbVie, Merck or Coca-Cola, we believe the portfolio is well-positioned for a more difficult environment. These companies have survived and thrived in previous market cycles. They have been left behind at times in the enthusiasm for AI and look well priced. 

It is the conviction in these companies rather than the macroeconomic environment that has led us to push up gearing on the trust. In consultation with the board, we added £100m of gearing just after the half way point this year. The net gearing level on the trust had been pushed lower by share price growth, and we are adjusting to bring it in line with historic levels and make use of the investment trust structure that allows for borrowing.

It is undoubtedly a complex moment for stock markets. Murray International Trust has been making a careful adjustment to those companies that can thrive in this environment. Economic cycles are inevitable: truly active managers can steer through them.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Investment objective

The Company’s investment objective is to achieve an above average dividend yield, with long-term growth in dividends and capital ahead of inflation, by investing principally in global equities.

Important information
Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.

• Past performance is not a guide to future results.

• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.

• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.

• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.

• The Company may charge expenses to capital which may erode the capital value of the investment.

• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.

• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.

• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.

• The Company's portfolio includes investments in bonds. There is a risk that interest rate fluctuations could affect the capital value of bond investments. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the bond issuer to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘sub-investment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. The capital value of the bonds may fluctuate accordingly.

• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

• The Company's portfolio includes investments in emerging markets which tend to be more volatile than mature markets.

Other important information:

Further information, including the Key Information Document (KID) and Pre-Investment Disclosure Document (PIDD), can be found on the Murray International Trust website.

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.

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