There’s No Free Lunch in Trump Plans, $30 Billion Manager WarnsBy
Storebrand says ‘positive’ Trump effect may last 3-12 months
Says key will be to monitor U.S. labor market, wage growth
The stimulus promised by U.S. President Donald Trump will be a boon to economic growth and global stock markets but eventually someone will have to pay for it.
Tax cuts and infrastructure spending aren’t “a free lunch,” Olav Chen, head of allocation and fixed income at Storebrand Asset Management in Oslo, said in an interview on Friday.
“It means that the U.S. government is borrowing more money and that government debt will increase,” he said. “And it must be serviced down the road.”
Global bond investors are in agreement. The yield on the 10-year benchmark U.S. Treasury has jumped 61 basis points over the past three months, marking one of the worst performances in the developed world. Stock markets, meanwhile, have rallied since Trump’s unexpected victory, with the MSCI World Index climbing about 6 percent since November 8.
For Storebrand, this “positive Trump effect” could last for the next 3 to 12 months, according to the 39-year-old manager.
“For 2017 and 2018 Trump is positive for the growth picture,” he said. “But longer term it’s negative if there’s protectionism and a trade war. And if GDP growth is too high it will lead to inflation and wage growth.”
Chen, who oversees about 250 billion kroner ($30 billion), sees Trump’s protectionist agenda as the biggest threat to economic growth.
“What I’m most scared of is a trade war between U.S. and China”, he said. “If the U.S. is also starting to negotiate on the Taiwan issue, that’s a big no-no for China. China won’t budge on the one China policy. Trump may use Taiwan as a negotiating card. I’m afraid that will escalate.”
Storebrand bought global stocks in its tactical mandates in the past week. These portfolios are overweight equity and credit and underweight government bonds.
“Higher growth because of Trump will lift stock markets as long as it doesn’t trigger fears for inflation,” he said. “The key will be to monitor the U.S. labor market and wage growth.”