Investors need to re-evaluate their investment strategies as the result of the recent US election is likely to drive inflation upwards, according to Standard Life Investments.
Though inflation was already trending upward prior to Donald Trump’s victory at the polls, his win means there is now “less doubt that the outlook for fiscal policy has changed”, said Standard Life Investments chief economist Jeremy Lawson.
“Even the House Republican fiscal plan could lift growth by one-percentage point in 2018, let alone the tax cuts and spending increases Trump was pushing for before the election,” he said.
“That would almost certainly be enough to completely eliminate the output gap and force inflation up more quickly.”
Mr Lawson said headline and core consumer price index inflation will likely average 2.6 per cent in 2018 as a result, placing it 0.3 percentage points above Standard Life Investments’ pre-election forecast.
“The US Federal Reserve (Fed) is unlikely to be comfortable with this acceleration, especially if the new president installs a more hawkish Fed chair to replace Yellen that year,” he said.
“That could make 2018 a bumpy ride for markets still priced for gradualism.”
This sentiment echoed comments from Eaton Vance co-director of global income Eric Stein, who said Mr Trump’s win could usher in a new environment for rates – with a knock on effect for bond markets.
“Both real rates and inflation expectations had been picking up even before the election – now, after President-elect Donald Trump's victory, we may be in for a very different bond market,” he said.
“More fiscal spending should help boost inflation, especially if wages continue their pre-election march higher. Whether it triggers higher economic growth remains to be seen, and depends on potential tax cuts, regulatory changes, protectionism and targeted infrastructure spending.”
Mr Stein said investors will need to become more flexible and adopt investment strategies that profit from higher interest rates and a stronger US dollar, cautioning that “most investment strategies are positioned to only make money from lower interest rates and a weaker dollar”.
“While the election of Donald Trump has widened the expected range of both economic and market outcomes, so far the market is indicating a higher probability of better growth rates and a higher interest rate structure,” he said.
“Going forward, I think investors should look for strategies that can be opportunistic with long and short positions.”
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