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In Trump’s world, I’m glad I hold bonds

Ed Monk

Ed Monk - Fidelity Personal Investing

In 2017, President Donald Trump was challenged by his economic advisers to explain why he believed the US was losing out on trade, and therefore needed to launch a tariff war.

In Trump’s world, I’m glad I hold bonds

‘I just do’, the President replied. ‘I’ve had these views for 30 years.’

The exchange was reported in ‘Fear’, Robert Woodward’s account of the early days of the Trump administration, and it helps explain the current global economic picture. The President’s view of the world - which he now has the power to make real - was forged in the 1980s, when Trump was building his profile as the archetypal celebrity tycoon.

America had spent much of that decade soul-searching about its role in the world and fretting that it was being overtaken by the new power from Asia, and Japan in particular. And it was more than just an economic debate. A running theme in the wider culture was anxiety about imports from Asia, and largely unfair stereotypes about Japanese and Chinese products being inferior to American versions.

This paranoia was even lampooned by Hollywood, with ‘Gremlins’ depicting small town America as besieged by little green monsters invited in from the east. (The villain in the sequel, Gremlins 2: The New Batch, was ‘Daniel Clamp’, a real-estate tycoon who plots world domination from a 5th Avenue skyscraper.)

Donald Trump believed it all back then and he believes it now. In his eyes, trade deficits with foreign nations means the US is losing. As such, he really believes it when he says that Americans will win in a tariff war - the deficit will be made to come down and that puts the US back on top. The fact that US companies, and eventually US consumers, pay the final bill is a mere means to an end.

So far, financial markets have tried their hardest to look past the President’s increasingly alarmist rhetoric on trade. That may have changed last week when the President announced plans for tariffs on Mexican imports, starting at 5% and rising in increments unless America’s neighbour satisfies the President’s as yet undefined demands on immigration.

The news triggered falls for US stock markets, with some of America’s most recognisable companies suffering the most including Ford, General Motors, Walmart and Levi Straus. The move suggested the President was now ready to weaponise US economic policy in his domestic political fights.

The market falls made a bad month worse, and the S&P 500 finished May almost 7% lower than it started it. Investors’ resolve is being tested at a time when global growth has been slowing. Trump’s aggressive trade talk appears to be unlocking a more fundamental pessimism.

All this is why I’m very glad to be holding 20% of my long-term investments in bonds. That’s actually quite a low weighting, but it has still helped cushion the most recent falls for equity markets.

Global government bonds have outperformed global shares this year, and in April and May in particular. The last few weeks have seen the two assets diverge, which is exactly what successful diversification is supposed to deliver. It hasn’t always been that way, and there was a long period after the financial crises when bonds and shares moved together, but now their inverse correlation appears back in place.

The Select 50 contains a number bond funds that offer potential diversification. Jupiter Strategic Bond is actively managed and can go anywhere in the bond universe to get returns. It is highly-rated.

You can also get broad exposure to global bonds markets through an ETF, or exchange trade fund. iShares Global Corporate Bond tracks the bonds of companies while iShares Global Government does the same for government bonds. Both feature on our Select ETF list.

Important Information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. The Select 50 or Select ETF is not a recommendation to buy or sell a fund.  There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.