The billion-dollar fund manager's challenge: Reading the mind of Donald Trump

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Jack McIntyre, a globetrotting portfolio manager at Brandywine Global Investment Management in Philadelphia, says he has frequently felt more like a political scientist than an investment analyst in the years since the financial crisis put governments at the centre of many bond markets.

Over the past few months, however, his job description has shifted yet again. "Recently, I feel more like a psychologist," says Mr. McIntyre, who manages the Legg Mason Brandywine Global Opportunities Bond Fund. His main challenge? Attempting to read the mind of Donald Trump.

Mr. McIntyre, who oversees $3-billion (U.S.) in the global bond fund, needs to figure out whether the new U.S. President will actually follow through on his tough-talking trade agenda or – as most people expect – soften his stance now that he has taken office.

"I can't remember a time like this – when so many things are fluid and we legitimately don't know what a new administration will do," the fund manager says.

His caution underscores the uncertainty that many investors feel as they contemplate what the Trump administration will bring.

How that uncertainty resolves itself is likely to be the key investing question of 2017.

The biggest single question is how serious Mr. Trump is about pursuing a radical reworking of U.S. trade.

On Monday, as one of his first official acts, Mr. Trump signed an executive order withdrawing the United States from the Trans-Pacific Partnership, a trade deal among 12 countries, including Canada, that was still awaiting ratification by Congress.

The President has also signalled his intention to renegotiate the North American free-trade agreement and penalize U.S. companies that move jobs abroad. If he follows through on his campaign rhetoric, he will also slap big tariffs on U.S. imports of Chinese and Mexican goods.

All of that would reverse decades of U.S. policy in favour of free trade and could lead to retaliatory action from other countries. In a worst-case scenario, the result would be a global trade war, with countries erecting higher and higher barriers against each other's goods, crippling growth in the process.

For now, though, most observers expect cooler heads to prevail. "Investors' worst fears about Trump's protectionist trade policies are unlikely to be realized," Oliver Jones of Capital Economics wrote in a note Monday.

One reason for the relative calm about Mr. Trump's protectionist leanings is that it's difficult to find many mainstream economists who share his passion on the topic. The assumption is that his campaign rhetoric will inevitably get toned down in practice.

Economists generally agree that automation, not foreign competition, has been the prime culprit in reducing the number of manufacturing jobs in the United States and other developed countries.

"Convincing manufacturing companies to keep – or bring back – jobs, one company at a time, is not going to restore the millions of jobs that have been lost due to technological change," David Deming of the Harvard Kennedy School writes.

It's also hard to find evidence that the trade deficit is hurting U.S. growth.

"Over the past two decades we have seen the opposite of a 'trade deficit drag': larger trade deficits have occurred when the economy has been growing more rapidly and smaller trade deficits when the economy was performing poorly," writes Menzie Chinn of the University of Wisconsin and Michael Klein of Tufts University.

But Mr. Trump feels differently and has for three decades. Mr. McIntyre, the fund manager, points to the President's appearance on Oprah Winfrey's talk show in 1988, when he railed against foreigners taking advantage of the United States and pledged to take a much tougher line if he were ever in office.

"He's a zero-sum type of guy," Mr. McIntyre notes. "He doesn't like to talk about the mutual benefits from trade. He figures if someone is doing well, someone else must be doing poorly as a result."

Still, Mr. McIntyre is betting that the worst is over now that Mr. Trump has actually taken office. "Ultimately, I think he's a pragmatist on most issues," he argues.

As a result, Mr. McIntyre is tilting toward emerging market bonds, especially Mexican issues, which have been hammered by trade worries and could rebound if developments aren't quite as bleak as many expect.

He's also been buying U.S. Treasuries because he believes the strong U.S. dollar and rising rates are likely to put the brakes on economic growth and U.S. stocks.

"Everyone hates bonds right now," he says. "But I think the prospects are actually pretty good."