Goodbody warns of Trump’s ‘beggar thy neighbour’ plans

Goodbody Stockbrokers has warned wealthy clients not to “chase” a global stocks rally seen since Donald Trump’s election as his plans to stoke growth in the world’s largest economy may have negative consequences.

Bernard Swords, chief investment officer at Goodbody Wealth Management, told clients in a note late last week that Mr Trump's goal of raising US economic growth through a stimulus plan and tax cuts would normally benefit the rest of the world.

However, “some of the plans of Trump’s policy are ‘beggar your neighbour’ plans”, said Mr Swords. “The rationale for cutting the corporate tax rate is to create jobs in the US rather than elsewhere. That’s good for the US, but for the global economy it is a zero-sum game.”

In addition, the stimulus plan will ultimately lead to higher interest rates and bond yields, which will depress the valuation of other assets.

Negative impact

“For equities, there is a period where the positive impulses of higher expected growth offsets the negative impact of higher bond yields, but it does not last forever,” he said. “Should bond yields rise another 0.4 per cent the negative influence could become dominant, so chasing equity markets here could be a little bit dangerous at this point.”

In the eight trading days since the US elections, bonds globally have slumped, sending the yield on US 10-year Treasuries up 0.6 percentage points to 2.35 per cent, the biggest two-week movement since 2001.

The yield on Ireland’s 10-year government notes have jumped to almost 1 per cent from 0.7 per cent over the same period.

Irish index

Meanwhile, the Down Jones Industrial Average has surged, for example, 3 per cent, and the Iseq in Dublin has added 3.4 per cent, leaving the Irish index just 1.2 per cent below where it was immediately before the Brexit vote.

“Back in June we were fretting about being locked in a deflationary spiral because all [central bank] policy measures taken up to then were having no impact,” said Mr Swords. “Cyclical shares and banks were trading at five-year relative lows against the US market, but that has now reversed and they stand at five-year relative highs. To get us moving significantly higher, we need a near perfect outcome.”