The perceived investment upsides from the new US administration have been called into question, with one prominent manager casting doubt on the wisdom of so-called “Trumpflation” trades.
James Anderson, lead manager of Baillie Gifford’s £4.5bn Scottish Mortgage Investment Trust, said despite many seeking to capitalise on an expected resurgence of inflation owing to Donald Trump’s policies, the reforms could, in fact, give way to deflationary pressures.
Mr Anderson, who runs the fund with co-manager Tom Slater, warned trades looking to benefit from an uptick in inflation could be misplaced.
“Do we really believe that somehow Mr Trump is going to make inflation and economic activity go up?” he said.
“We believe global disinflation and potentially deflation is a matter of structural and technological change.
“The one thing you can be sure Mr Trump will do is cut taxes for very rich people. We should have learned over the past 25 years that tax cuts for very rich people are profoundly deflationary and not good for global growth.”
Inflation expectations have changed dramatically in the past 12 months. Last January, investors were nervous that developments in China and elsewhere could feed into a disinflationary, or deflationary, environment, a concern which helped spark a sell-off in the opening weeks of 2016.
However, while an emerging consensus that the Republican – who has pledged to increase infrastructure spending as well as cutting taxes – could help stoke global inflation, many remain unsure on whether this will be driven by growth (‘demand-push’ inflation), or rising costs.
Expectations of the former have been reflected in forecasts and markets, with US Treasuries selling off and cyclical assets rallying aggressively. In addition, the Bank of America Merrill Lynch’s latest global fund manager survey recorded inflation expectations at their highest levels on record.
But it is the potential impact on global growth that is concerning some given Mr Trump’s protectionist instincts. In the same survey, 29 per cent of respondents identified a trade war or protectionism as the biggest “tail risk”.
However, others back Mr Anderson’s view that the Trump presidency could provide a contrasting mix of economic effects, with the potential for fiscal expansion occurring at the same time as a crackdown on global trade.
Nick Mustoe, Invesco Perpetual’s chief investment officer, warned the impact of the new administration’s policies could take time to identify.
“It’s going to take us a good few months to actually see what transpires from the rhetoric and the election campaign,” he said.
“If you look in the US market, there’s a huge focus on the beneficiaries of Mr Trump’s promise of tax cuts, deregulation and fiscal stimulus, but you have to balance that with how that is paid for.”
Mr Mustoe also pointed to other policies that would “concern the market, particularly relating to tariffs”.
A number of trades based on Mr Trump’s potential to boost growth and inflation have faltered slightly in recent weeks, with the US dollar in particular reversing course.
