Produced in partnership with PGIM.

The “protectionist impulse” that led the Trump administration to impose the widespread tariffs now shaping global trade is no more than a speed bump for the fixed income markets, Robert Tipp, PGIM chief investment strategist and head of global bonds, told the Investment Magazine Fiduciary Investors Symposium in Healesville, Victoria.

Neither of the two countries most at risk in the trade war – the US and China – are showing signs of strain as a result of the trade war.  China’s exports to the US have fallen, but increases in exports to other countries have more than offset, allowing China’s exports in total to continue to rise.  As for the US, the increase in prices are taking what appears to be a manageable bite out of the purchasing power of US consumers and businesses, allowing economic growth to continue nearly unabated.

The failure of governments around the world to address debt levels is unlikely to have a profound impact on markets over the near to intermediate term, Tipp said. But the ongoing “fiscal insanity” of ever-growing government debt is impacting  market pricing on the margin – government bonds are cheapening relative to interest rate swaps, and effectively cheapening relative to corporate bonds as the market’s quid pro quo for buying increasing sums of government bonds.

But overall, with the exception of the occasional hiccups like those seen in France and the UK, the impact of the inexorable rise in debt remains orderly, “a non-pressing issue” for markets, Tipp said.  One saving grace is the fact that debt burdens are high across the major development market countries – in the 100 per cent debt to GDP realm – allowing countries to kind of blend in. Meanwhile, corporate fundamentals generally remain sound.

“The multinationals, they don’t need the money,” Tipp said. “They’re largely in the market borrowing for financial purposes – share buybacks or acquisitions.  But otherwise, their cash flow generation is adequate to fulfill their investment needs.

Things have changed a lot in terms of the trajectory of government debt over the first 25 years of this century.  Post WWI and II, countries would pay down their debt between wars, and “as recently as 2000, the United States were United Kingdom were paying down their debt while European countries had just squeezed into the monetary union and were set to abide by hard, fast fiscal rules – or so it seemed”.

But that’s all gone. Eurozone countries continue to water down their debt repayment criteria.  The US has seemingly no guardrails for fiscal policy.

Will developed markets become emerging markets?  After all, Argentina, now struggling to regain its footing, was one of the top 10 wealthiest countries in the early 1900s.  But that’s not where developed market countries are headed, at least not yet. Tipp noted that it can take a lot more than just fiscal imprudence to ruin an economy.  We would need to see debasement of the currency, and an attack on the private sector that ruins industry, to a point where companies cannot compete regardless of the level of the currency.

“The United States remains a solid economy with a vibrant private sector, and a corporate sector that is supportive of the government, so I think this can work for a long time, but it’s not an ideal state of affairs,” Tipp said.

Big picture, we remain at a strategic buy point for bonds with investment grade yields towards five per cent and high yield at six or seven per cent”.

“In bonds, yield is nearly destiny, so investors largely earn those yields over the long term.  So far, money has continued to stream into money funds, more so than into stocks and bonds.  But as money market yields fall, people are going to start to thinking about moving from money markets to bonds to lock in those yields for the long term.

This technical backdrop may remain strong for stocks as well, as bull markets like the one we’re in now, that started when the S&P broke out of its 2000-2013 range could run for several more years, like the runs of the 1950-60s, and 1980-90s.  Positive returns continuing if not accelerating until the early 2030s would not be surprising; it would just fit with the normal pattern.”

While that may sound outrageous, that too is part of the “normal pattern” where the first 50-70 per cent of the rally makes some sort of fundamental sense, and the remaining 30 to 50 per cent goes beyond normal valuation  bounds.

“Hey, we’re used to seeing the stock market screen expensive on a valuation basis.  But if and as cash rates fall, we may get used to seeing the bond market screen as expensive on a valuation basis.”