Donald Trump’s election has unleashed radical changes in the financial landscape since November, with reflationary policy expectations pushing up long bond yields, the dollar, and the equity indices. Since Trump took office, however, investor enthusiasm has cooled, as the new US president’s first announcements have dealt with healthcare, immigration and international trade, rather than the fiscal boost hoped for through tax cuts or infrastructure spending. This has kept long bond yields and the US dollar from rising any further.
Against this backdrop, two investment strategy visions will face off in the next few months. To wit: have we embarked on a structural upturn in interest rates, the mirror image of the decline they began in the early 1980s? Or has the trend seen since 20 January been a mere correction of market excesses?
We think it’s the latter. Yes, the protectionist rhetoric that is spreading worldwide is likely to feed inflation fears, while pressures on the US labour market are undeniable at this very late stage of the economic cycle. However, we believe that deflationary pressures are still very much with us, driven mainly by the impact of new technologies and the need to absorb the massive stocks of debts piled up in recent years. Bonds, US Treasuries in particular, will therefore continue to play a useful role as tactical allocation and hedging instruments during risk-on phases.
Meanwhile, and surprisingly so in light of all the above, the equity markets remain solid, with far lower volatility than bonds. But beneath this superficial calm, powerful rotations between sectors and factors are at work, and these are offering asset managers some attractive investment opportunities.
Chief Allocation Advisor