Donald Trump plans to change things. He wants to spend more on infrastructure in both the public and private sectors. He wants to slash corporation tax to 15 per cent, and make an offer companies cannot refuse to bring back onshore the large sums of tax-shy cash sitting outside the US. He wants everyone who earns less than $25,000 a year to be taken out of income tax. He wants better trade deals that give the US more chance to compete.
I confess I did not dare write last month that I thought Mr Trump might win. I just got on and positioned the portfolio for that event. Everyone I spoke to was so negative about Mr Trump, disliking his views and convinced he could not become president, so I assumed the markets would take a tumble if he surprised them. Sure enough, the first reaction was a 5-6 per cent markdown of prices on the news.
I soon realised, however, that the gloom would not last long and I had to scramble to put the money back into the markets as they turned upwards. I guessed that other investment managers were in practice quite liquid, and all could see the intended reflationary impact of Trump policies after the event.
More successful was the action I took last month to protect the big currency gains made so far this year by holding shares out of sterling. I took out currency cover where I could, and this is now needed. Sterling has started to rise against both the dollar and the euro. The pound was too cheap, and the Bank of England, as I imagined, has had to admit it does not need to make further rate cuts or create more money under an extended quantitative easing programme. I always thought the July package was unwise. Cash and credit were accelerating before it, the economy was fine, and such action served to undermine the pound more than was needed just to give the UK a better competitive edge.
In similar vein, the decision to sell all the conventional UK government bonds was a good call. Interest rates have since risen from their rock bottom lows of August. The short corporates I hold have been more resilient and pay a better income. There is now also a trend of rising rates in the US. I don’t think the BoE should let UK rates get out of line with US ones, as our economies are recording similar rates of growth and will experience rising inflation from here, leaving aside the additional one-off effect on prices from lower sterling. The BoE and some in the market are still worried about deflation, when the new issue is inflation.
So what should we expect next? Growth in the UK looks set fair. I have stuck with the Treasury forecasts in March of 2 per cent growth this year and 2.2 per cent next year. I have looked with bemusement as the BoE and many other forecasters slashed their figures for both years, and then with relief as they have written their 2016 forecasts back up to where they were before the Brexit vote. The UK property market has remained strong despite all the efforts of some valuers and the BoE to talk it down, and UK consumers have been keen to buy and go to restaurants and hotels.
I am still more optimistic than the pack over next year. Forecasts have tiptoed their way back up from 0.8 per cent UK growth; in the case of the BoE, to 1.4 per cent. I can’t see how it can be that low, when you look at the current rates of money and credit growth, employment growth, housebuilding and the other main indictors.
It will take time and probably compromise and some disappointment for Mr Trump to put in place his reflationary packages, but the direction of travel is clear. That should mean a more positive result from the US by the back end of next year. Congress may want to argue over debt ceilings. There will be long debates about how much extra revenue cutting tax rates might bring in from extra activity, and when. The Democrats, who should favour a fiscal stimulus, may not be able to get over their shock and dislike of a Trump win quickly enough to co-operate. The good news is the US economy is growing reasonably well anyway, and there will be corporate and popular pressure behind Mr Trump to spend more and tax less to get it going faster.
This is a good background for equity investment and is why I have again increased the proportion of the FT fund held in shares. It is not such a good background for bonds. I have put most of the money into short-dated company paper which will go down less as rates rise, and offers a bit more income as a cushion. I also continue with the inflation linked bonds, though they have not been exempt from some of the gilt market fall. These have nasty negative real yields, but they will be paying out more income and have some capital protection as inflation rises. More are likely to want some inflation insurance.
|Year to date — 31/12/2015 – 21/11/2016||11.8 %|
|Since inception — 14/11/2012 – 21/11/2016||31.4%|
|Annualised since inception||7.0%|
I hope the arrival of Mr Trump signs off any thoughts of lower rates and more money printing in the US. Though the BoE and the experts don’t admit it yet, I think it also does the same for the UK. The long bond bubble may not deflate drastically, but more will now worry about the elevated valuations of government loans. When something looks absurd to the layman but can be well explained by the expert, it probably is absurd. I refuse to own bonds that offer a negative nominal income, and think US and UK government bonds are still dear even after the recent little sell-off.
The FT fund is up 11 per cent year to date, and 30 per cent since inception. That’s a useful annualised return of 7 per cent, from a balanced portfolio with roughly 50 per cent held in shares.
John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. email@example.com
|Cash Account [GBP]||0.9|
|iShares Nasdaq 100 ETF||7.1|
|WisdomTree Germany Equity UCITS ETF — GBP Hedged||1.3|
|iShares Core MSCI Emerging Markets IMI||4.9|
iShares Global High Yield Corp Bond GBP Hedged ETF
|iShares FTSE EPRA/NAREIT Asia Property||3.7|
|iShares MSCI World Monthly Sterling Hedged||10.4|
|iShares GBP Corporate Bond 0-5 ETF||8.7|
|iShares FTSE EPRA/NAREIT UK Property||4.9|
|L&G All Stocks Index-Linked Gilt Index I Acc||8.2|
|L&G Short Dated £ Corp Bond Index I Acc||12.3|
|L&G Global Real Estate Dividend Index Fund (L Class Acc)||2.7|
|iShares Global Inflation Linked Government Bond ETF||8.7|
|iShares Sterling Corporate Bond||3.7|
|UBS CMCI Composite UCITS ETF A-acc||2.7|
|SPDR S&P UK Dividend Aristocrats ETF||2.4|
|Vanguard FTSE Japan ETF||4.1|
|db x-trackers S&P 500 UCITS ETF (DR) 2C (GBP Hedged)||6.2|
|db x-trackers MSCI Taiwan ETF||1.9|
|db x-trackers FTSE China 50 ETF||2.7|
|Source: Charles Stanley Pan Asset|