Markets Spotlight: the costs of protectionism

Our round-up of the week’s best comment and analysis from the Financial Times focuses on the effects of Donald Trump’s protectionist policies, the future of a stronger dollar and oil prices.

The selection is taken from our Markets Insight and Smart Money columns, written by industry contributors and FT commentators.

Investors have benefited from Trump reflation story, says the FT’s senior economic commentator John Plender, but they might be missing the effects of the costs of his protectionist policies.

“Markets assume that the Trump reflation will take care of all problems. Yet a much stronger dollar than currently expected on the back of trade friction, if not war, could deflate the animal spirits on which the story depends”.

Robert McNally, the president of The Rapidan Group energy consulting firm, argues that the past 10 years of rotating oil prices show that Opec might no longer be an effective supply manager, which can eventually lead to free crude oil market.

“Leaders will desperately grasp for solutions. They should avoid mistakes like price controls, import tariffs or throwing in strategic stocks. Better options include promoting resilience and transparency by improving data, fostering well-regulated, expanded financial markets and weaning the oil industry and consumers off subsidies”.

The FT’s Miles Johnson says that the lack of market volatility may be one of the reasons why ultra-high frequency trading firms have announced falls in their profits this year.

“A far less encouraging explanation for investors in these businesses is that the sustainable trading edge that had enabled some of them to be so impressively profitable has for some reason quietly started to be eroded by competition”.

John Bilton, global head of multi-asset strategy at JPMorgan Asset Management, warns that consensus for a stronger dollar may be tricky as US currency is no longer cheap and a lot of optimism is already priced in.

“We would treat the widespread expectations for a significant dollar rally in 2017 with a healthy dose of scepticism. Early indications of the policy priorities emerging in the US suggest a more protectionist approach to trade, yet the US dollar has, so far this year, softened by nearly 2 per cent”.

The FT’s Robin Wigglesworth explains why computer-driven trend-following hedge funds suffered losses, at the same time it was one of the biggest winners of investors’ inflows last year.

“The primary explanation for the divergence between performance and investor flows is the evolving role that trend-following hedge funds play in a pension fund or endowment’s portfolio”.

Johns Authers, the FT’s senior investment commentator, argues that the year of losses of big US universities endowments results from an alternative-based investment model that seems not to bring expected profit.

“Over the longer term, the alternatives-based model still looks to be on rocky ground. Over the past 10 years, the average billion-dollar endowment has gained 5.7 per cent a year, which lags behind a 60/40 fund’s return of 6.4 per cent”.

Changing American tax code might impact financial reporting by ending the prominence of earnings before interests, tax, depreciation or amortisation, so called ebitda, argues the FT’s Dan McCrum.

“A proposal from the Republican party — via members of the House of Representatives — would allow companies to treat investment in buildings, equipment and intellectual property as a normal cost in the year the money is spent.

“At the moment such capital spending gets accounted for as an investment, so the expense is taken over time through annual depreciation charges when calculating profits. To encourage such spending the rules could be changed to give a company all the benefit of reducing taxable profits straight away.”