Trump card has investors on their guard

THERE is nervousness creeping in to markets, not necessarily because of what Donald Trump has done so far, but more because of what he might do next, with most fears centring on what sort of trade barriers he might try to raise against China.

We can’t see how it wouldn’t put downward pressure on global growth, which would be most unwelcome. Commentators have made comparisons between Trump and Ronald Reagan, suggesting that the “Reagan Boom” could be repeated.

We would be extremely wary, even though one can see the superficial attractions.

Unfortunately, Trump faces much greater constraints.

Reagan inherited an economy that was on its knees, with doubledigit inflation and interest rates. Unemployment was almost nine per cent. We are currently eight years into a shallow growth cycle, with US unemployment at 4.7 per cent and inflation limited.

Reagan also found the government’s finances in good shape, with a debt-to-GDP ratio just over 30 per cent in stark contrast to the current number approaching 90 per cent.

The ageing US population throws down further challenges. The median age of Baby Boomers in 1981 was just 26 and entering its peak period of consumption. Now they are more likely to be retiring, downsizing and living off their pensions and savings. It’s not clear that Generation X or the Millennials can take up the slack.

The other big difference that leaps out is the relative positions of the US and China in the global economy. In 1981 the US accounted for 28 per cent of global GDP; it is still an impressive 25 per cent. In 1981 China had three per cent of the global economy, but has now reached 15 per cent.

This means that any sort of trade spat between the US and China has the potential to be impactful, not to mention the greater geo-political heft that China now wields, seen, for example, in its approach to territorial claims in the South China Sea. None of this spells immediate doom, but it does mean we must be on guard. John Wyn-Evans is head of investment strategy at Investec Wealth & Investment