While some strategists have compared US President-elect Donald Trump to former US president Ronald Reagan, Jamieson Coote Bonds warns his effect on the US economy is unlikely to be as positive.
The firm cautioned investors should be wary of recent commentary that Mr Trump’s presidency will have a reflationary effect on the economy and allow interest rates to rise.
“We need to be careful what we wish for here. Sustained inflation means sustained rate hikes, which on the world's largest ever debt burdens - cannot end well,” Jamieson Coote said.
Jamieson Coote noted that while the economy was successfully stimulated under Mr Reagan, the US debt-to-GDP ratio at the time only reached the upper 20 per cent range, and “also coincided with massive falls in interest rates” that provided a growth tail wind.
“In the forward period of ‘Trump-O-Nomics’, we are looking at mainly headwinds under already mid-70 per cent level debt-to-GDP ratios, together with a congress very weary of further extending the current large debt burdens,” Jamieson Coote said.
Additionally, the initial market reaction to Mr Trump’s victory, which saw bond yields rise, was likely a case of “shoot first and ask questions later”, Jamieson Coote said, a theory supported by current asset-market correlations.
“During this past week, asset-market correlations have grown increasingly negative, showing significant divergence between rates/credit and equities performance,” the firm said.
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