Bruce Stout: Miserable, yes. Bearish, no.

Merryn Somerset Webb talks to Bruce Stout, senior investment manager in the global equities team at Aberdeen Asset Management, about the dawn of a decade of deflation.

Bruce Stout, senior investment manager in the global equities team at Aberdeen Asset Management, talks to our editor in chief about the dawn of a decade of deflation.

I'm not sure Bruce Stout much likes being interviewed. I suspect he has better things to do. That's as it should be, of course - he's a well-regarded fund manager, not a Big Brother evictee.

On the other hand, we're sitting across from each other in one of Aberdeen's meeting rooms and I'm after a few exciting quotes, a bit of drama perhaps - a hint of the excitement that might come with the end game of the financial crisis. Instead, I'm getting short answers filled with near-relentless misery. I ask what he sees ahead for Britain (I am still totally obsessed with the inflation/deflation argument). "A lost decade... very low interest rates, very low growth very poor profit growth, very poor dividend growth."

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So pretty nasty then? "Grim. People talk about a contraction in the standard of living [but] people have no idea what that means in this country." If you want to see what it really means, you have to look to Japan and see how the young, however well educated, could never get jobs "because companies won't expand". Or to the people who never make it on to the housing ladder as "bank lending and lending standards tighten". Imagine a situation where house prices are still seven times the size of your salary, but you can't borrow more than twice your income.

For years now, says Bruce, real wages have "gone nowhere" in Britain. We've all been convinced that we've been getting better off simply because we have more TVs than we once did. But that's just been about the price of TVs falling. "Yet the standard components of your expenditure have been rising" - gas prices, electricity prices, oil prices, mortgages, and so on. The credit bubble masked this for years. Now the average person will have to "allocate their capital in a different direction". And cutting government spending certainly won't help, however much finger-crossing Cameron and Osborne do. Why? Because the biggest component of government revenues is income tax and national insurance.

"So when unemployment starts to go up, revenues from these come down, as they do from stamp duty, corporation tax, and so on. So it is difficult to suddenly shrink the public sector." At the same time, a deteriorating economy will make things worse for the banks as "a good loan turns into a bad loan" and lending contracts further. Go up to Stockbridge (a fashionable part of Edinburgh) today, says Bruce, and "I can guarantee that Costa will be full of people having £2 coffees and £3 paninis". They won't be there in a decade. Truth is that "if you go on a credit binge for 20 years there is going to be one heck of a howl" as it comes to an end.

I know Bruce is spot on with the Costa comment (they do a great flat white and their sofas are mildly superior to the ones down the road at Starbucks). But I'm not sure on the decade of deflation. I've been convinced by my conversations with CSLA's Russell Napier about the extent to which democratic populations will tolerate inflation. Russell sees public resistance to deflation as the trigger for policy moves (money printing) that will trigger hyperinflation.

Will we really tolerate deflation?

But Bruce isn't having any of it. He points again to Japan, which has clearly been tolerating deflation for 20-odd years. But I see the Japanese as being a bit different - where we whine and strike, they persevere. I was in Japan for much of the 1990s and while I remember many conversations with people about the miserable state of their nation, I don't remember any of them ever saying that their firm or government's treatment of them had annoyed them so much that they were going to set fire to tires on the street or spend a week sitting in the sun on a picket line instead of pounding up and down a production line in Nagoya.

That makes them different to the Greeks, who so far haven't been particularly happy to cooperate with their austerity programme. And different to the Spanish, where, according to the unions, some 75% of public-sector workers joined this week's strike protesting against 5% pay cuts. And, of course, different to us. Only on Tuesday this week, the man from the TUC joined a radio discussion to explain how David Cameron's hoped for "once in a generation" review of government spending could lead to "street protests". BA staff appear to be more on strike than off, and BT staff are set to strike next month over pay. So far so bad on the tolerating deflation front.

Still, Bruce thinks we'll just get used to it. After a few years of miserable media coverage of grindingly depressing economic data and non-stop credit contraction, our mindsets will change. Instead of pushing purchases forward in expectation of rising prices (as we have been), we'll start delaying them in the expectation of falling prices - adding yet another nasty dimension to the cycle.

A lost century for Britain

I ask again about the endgame. Where does this finish? "There is no endgame." Oh dear. Instead there is the "natural change in the balance of power that has gone on for hundreds of years. Go back to 1888 and the two most economically powerful countries in the world were Brazil and Russia. They've just had 100 years in the wilderness for various reasons... there are tons of examples of countries having 100 years in the sun and then disappearing." So not just ten years of grinding deflation, but 100 years in the wilderness too. And here was I thinking that MoneyWeek was occasionally overly minded to misery.

We move on to Asia. There things are different, if not in an altogether good way. Thanks to the huge populations in Asia and the southern hemisphere "they need real income growth; they must have it". Without job growth, China, for example, has a "big problem". But, I say, we "need" it too. How come they can have what they need and we can't? Because they will move "hell and high water to get it". And not being a democracy, they can. They can tell the banks to lend and they will, they can create as many jobs as they want - think Japanese-style hidden unemployment - even as their Western markets disappear. The "bottom line is, you will see real income growth in these places".

I'm not entirely convinced on this either - I see the argument, but as we surely know all too well by now, needing something isn't the same as getting it. And I find it really hard to see how the Chinese mix of central planning, crazy non-economic lending, and totalitarianism can really work out long term. Still, Bruce and I agree on one thing when it comes to China: we wouldn't actually invest there. Me, because I expect it to implode one way or another before too long (I can't think of endgames without drama), and him because however high the real income growth he expects is, China "is not run for shareholders".

Invest in Mexican loo roll

So where on earth would he invest? Well, he says, I mustn't make the mistake of thinking he is bearish. Right. Pessimistic, yes (very). Realistic, yes. Bearish, no. How does that work? Bruce has a global remit. That gives him huge choice - he only needs to find 40 or 50 decent business models across the world to build a fund and that isn't as hard as you might think. The mistake most investors make is to think that an asset is riskier if it is based in India or Brazil than in Britain or Europe. That's not necessarily so.

"Arguably the macroeconomic environment in Brazil is far superior to the economic environment that is operating in the UK" and the political environment is "far superior". Brazil has policy options - it has surpluses and all it has to do is decide how to allocate them to "wealth creation and the welfare state". (On the subject of policy options, we have none: with too much debt and no savings we "will be dictated to" by the markets.)

Aberdeen also found that the dismal years of 2008 and 2009 showed clearly and "encouragingly" that the Western banking crisis had no impact whatsoever on "a manufacturer of toilet paper in Mexico, a cigarette company in Brazil, or a soap and detergent provider in Indonesia". These are all good businesses based on local demographics, and the kind of businesses that Aberdeen look to buy at the right price - " you have still got to get it cheap".

And what makes a stock cheap? Sometimes book value, sometimes earnings ratios, but "the most attractive is always cash flow - free cash flow. Because if a company can generate cash, enough cash to spend and grow its business and still have money to pay you as a shareholder, what a great business model that is."

We're on a bit of a good news roll here, so I ask how the ordinary retail investor should be behaving at the moment. Down we go again. The first thing he needs to do is to "get a grip" of his expectations. You may still have in your head the idea that long-term returns on equities are around 5.8% and that you should therefore get around that yourself. Purge your brain of that thought. Instead, we should all be considering ourselves lucky if we get 3% (which, given the deflation Bruce expects, wouldn't be bad at all in real terms).

Hmmm. I try another tack. What's Bruce's current favourite investment? "I don't have favourites." OK, biggest holding? "You never buy one stock. You buy a globally diversified portfolio of companies that have business models that won't be affected by economic chaos." I give up. You aren't getting a stock tip out of this interview, but it does at least leave me pretty certain that investing in funds run by Bruce would be no bad way to attempt to weather the grim-looking decade ahead. Do so, and with a bit of luck you'll have a couple of quid to spare in 2020, and you'll be able to join me in Costa.

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 is the manager of the £958m, award-winning Murray International investment trust, which has trebled the performance of its world index over five years with growth of 117%.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.