If the ambitious - and often radical - policy decisions announced in the early months of the Trump administration added fuel to the fire of detractors, Trump’s increasingly protectionist stance on trade is beginning to anger those considered as being firmly in the president’s camp.
Trump’s trade policy is dismissing well established intellectual frameworks and the Republican caucus in Congress and leaders in the US’s corporate sector are starting to worry. While many agree that Trump has identified some deep inequities in world trade, his strategy is, unsurprisingly, being met with dismay by the majority.
“Even in the money management industry, it would hard to find anybody who supports any level of protectionism,” explains Tyler Mordy, President & CIO at Forstrong Global. “Whenever you have a challenge to the foundational frameworks of global trade, it can create volatility. A lot of people in the industry believe that the great depression was exacerbated by the protectionist leanings of many countries at the time, and I refer to free trade as a ‘sacred cow’ in the economics profession.”
Mordy believes that Trump’s protectionist efforts will ultimately end in a “pyrrhic victory”. In the modern, globalized world, the US risks becoming the biggest loser. “US trade law provides an almost infinite range of possible policies and the Trump administration could easily take several trade measures that would draw huge headlines and appease supporters, but would not have a material impact on overall trade volumes,” Mordy says. “Although this seems the most probable scenario, we continue to closely monitor risks.”
US equities have consistently trounced their counterparts over the past nine years. The MSCI US index has risen by roughly 400% from its 2009 low, while the MSCI All Country World ex-US index has risen by only slightly more than half as much. However, that outperformance does not look likely to sustain. Many money managers expect America’s waning leadership to contribute to the underperformance of US equities relative to global indices. Mordy points to three key drivers putting US equity outperformance into reverse: The Fed’ strategy of tightening while almost everyone else is on hold, the overvaluation of the US dollar against the likes of the euro and the yen, and the lack of attractively priced equities in the US market.
So, where may the next phase of outperformance direct itself? “Europe and Asia are the most likely candidates — regions that generally have cheap currencies, are showing signs of earnings and economic acceleration and trade on much lower valuations,” Mordy says. “Who can argue with rotating into less expensive markets, where business cycles have only just begun their expansion phases, where profits have plenty of scope for improvement and where monetary policy is years away from any substantial tightening?”