Woodford questions Trump reflation trade

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Woodford Investment Management has questioned the sustainability of the Donald Trump “reflation” trade that has excited markets since the results of the US election, arguing the president-elect’s slogan to make America “great again” is easier said than done.

Since the November vote, stock markets have rallied on Trump’s pledge to cut taxes and increase infrastructure spending. The Dow Jones Industrial Average enjoyed its longest winning streak in a year – following six weeks of gains as it headed towards 20,000.

But Woodford head of investment communication Mitchell Fraser-Jones says ageing demographics, weak productivity and excessive debt are too significant to be tackled in a single political cycle.

Speaking to the reflation trend, Fraser-Jones says: “We would caution against becoming too carried away by the prospect of a sustainable ‘reflation’, however. Making America great again is, in our view, going to be much more challenging than the market’s behaviour seems to imply.”

The market reaction has been based on misplaced optimism about growth and inflation, Fraser-Jones says.

The £9.3bn Equity Income fund delivered a negative return on the reflation trade as bond proxies, particularly tobacco, suffered negative market sentiment in response to bond yields rising. Imperial Brands and British American Tobacco were the fund’s biggest detractors.

The tobacco stocks account for 7.5 and 6.1 per cent of the portfolio respectively.

Fraser-Jones says the fund added to both positions as the investment team believes tobacco stocks remain well placed to deliver attractive long-term returns. He adds that the team considers the current market reaction to bonds is not appropriate.

The fund delivered -1.7 per cent in November, compared to -1.6 per cent in the FTSE All Share. In the year to date, the fund has delivered 0.7 per cent compared to 11.2 per cent in the index.

US pharmaceutical and biotechnology holdings were the portfolio’s strongest performers as the sector enjoyed a relief rally. The fund had previously suffered from its high exposure to the healthcare sector due to negative market sentiment on Hillary Clinton’s plans to tackle price gouging in the industry.