Is it time for the end of the world trade?

In other words, is it time for fund managers to buy ultra-safe assets — the so-called end of the world trades — as the election of Donald Trump as US president heralds a new and highly uncertain period for investors?

Despite a boost to US stocks on expectations of Trump tax cuts and infrastructure spending, fund managers may be entering a period of extreme instability as a populist backlash threatens to create havoc with the markets.

Lightning is not supposed to strike twice. But after the Brexit poll in June and Mr Trump’s victory last week, there is a danger that other populist electoral bolts from the blue will rock the world over the coming months.

The Italian government faces the prospect of a reverse in a constitutional referendum next month, National Front leader Marine Le Pen could win the French presidency next year, while Angela Merkel, the German chancellor, could be deposed in her country’s elections, also next year. Populist victories in any of these polls will represent not just a political sea change, but an oceanic upheaval.

So does it make sense to plump for safety trades, rather than bank on the so-called Trump reflation trade that has boosted US stocks?

UK government bonds, particularly at the short end of the curve, could offer a good store of value. Gains in the gilts market have reversed over the past few weeks, making them more attractive.

There is also logic in buying sterling at low levels, as these UK assets have what some investors are describing as first-mover advantage. They have already taken their hit from the UK’s vote to leave the EU in June.

Gold is another haven trade, particularly with some investors arguing that Mr Trump’s policies may be inflationary. Gold is considered a good hedge against inflation and uncertainty.

With Mr Trump and other governments keen to use infrastructure investment as a way to boost their economies as monetary policy runs out of steam, stocks that benefit from this type of spending would make obvious trades in the equity markets.

The possible reflation trade from Mr Trump’s victory is interesting. It shows the playbook in the wake of his election may not be the same as the one after Brexit.

If Mr Trump does implement his pledges on infrastructure, then that should help economic growth, not weigh on it as Brexit has done. Another factor that may help growth is the increasing likelihood that the US Federal Reserve will delay rate rises. Markets have scaled back expectations for rate increases in December.

This should restrain the dollar, which may be reaching its ceiling, even if the Fed tightens. This would be positive for emerging markets.

However, Mr Trump’s rhetoric and his actions may be very different. He could face opposition from Congress in terms of what he might like to do on infrastructure spending and tax cuts. Paul Ryan, the Republican Speaker of the House of Representatives, is a fiscal conservative, who will probably act as a constraint on Mr Trump and his plans.

The other important factor is international trade. If Mr Trump commits himself to even half of what he has promised in terms of protecting the US and American workers’ jobs from overseas competition, then world trade and the US economy is likely to suffer.

But, crucially, Mr Trump and Brexit may be the populist canaries in the coal mine. If the Italian referendum and French and German elections are overwhelmed by a wave of populist anger and resentment, then the whole EU project may be thrown into grave doubt, as well as the US economy.

That really would leave fund managers with little choice but to play it safe with clients’ investments. When Lehman Brothers collapsed in 2008, assets across the board went into reverse, with very few exceptions. If that is repeated in the event of a growing populist backlash, the so-called end of the world trade may be limited to buying short-dated Treasury bills and cash — and little else.