After delivering a passionate speech at Carmignac’s annual investor and media event – earning a hug from founder Edouard Carmignac – Head of Cross Asset Frédéric Leroux sat down with HedgeNordic for an insightful one-on-one conversation at their offices. With years of experience as a cross-asset portfolio manager and Deputy CIO, Leroux has developed a distinctive and well-informed perspective on the broader financial landscape. While much of the broader market remains preoccupied with the economic, geopolitical and social implications of Donald Trump’s return to the White House – which Leroux addresses in his investor note titled Trump 2.0 – his focus lies elsewhere. “The return of inflation,” Leroux asserts, poses a far more significant and enduring challenge for investors.

“Trump’s return to the White House is significant for markets and economies because it could trigger major changes – much will depend on his actions,” Leroux reiterates some thoughts from his Trump 2.0 note. “But that’s not what I believe will be the dominant force in financial markets,” he emphasizes. “In my view, the most critical theme for the global economy is the return of inflation.” After decades of subdued levels, inflation made a dramatic comeback in 2020, disrupting economies, businesses, and markets alike. Although inflation has since eased from its peak, its resurgence stands as a stark reminder of how quickly financial landscapes can change.

“But that’s not what I believe will be the dominant force in financial markets. In my view, the most critical theme for the global economy is the return of inflation.”

Frédéric Leroux, Head of Cross Asset at Carmignac.

“Even though we’ve had over two years of disinflation since the initial peak in October 2022, I expect a second wave of inflation to emerge, followed by a third and possibly even a fourth,” warns Leroux. “This mirrors the period between 1965 and 1980, where inflation persisted for 15 years in successive waves and peaks,” he explains. “I believe we’re on the brink of seeing something similar, at least in the U.S., likely with some correlation in Europe. One way or another, we will be part of this trend.” An often-overlooked risk, according to Leroux, is how the resurgence of inflation could undermine Trump’s policy agenda during his current term in office.

The Return of Inflation Could Undermine Trump’s Agenda

“What many people likely fail to understand – partly because they don’t believe inflation will return – is that Trump’s agenda is inherently tied to inflation,” argues Leroux. Paradoxically, the public concern over inflation that surfaced during President Joe Biden’s term may have secured Trump’s second presidency. Yet, Trump’s own policies are inherently inflationary. “If inflation makes a comeback, he won’t be able to achieve key objectives, such as restricting immigration or imposing tariffs, without facing significant economic constraints,” Leroux explains.

“If inflation makes a comeback, he won’t be able to achieve key objectives, such as restricting immigration or imposing tariffs, without facing significant economic constraints.”

Frédéric Leroux, Head of Cross Asset at Carmignac.

While Trump’s plans to curb immigration may be quickly implemented, they are likely to push up wages, which could eventually impact all sectors of the economy and contribute to inflation. “The U.S. faces a problem in its job market – there simply isn’t enough skilled labor unless there’s significant immigration. However, there’s resistance to more immigration, which makes this a challenge,” explains Leroux. Similarly, Trump’s proposed tariff increases would drive up consumer prices by raising the cost of imports and discouraging domestic manufacturers from reducing their prices, notes Leroux.

Trump’s plan to cut taxes, particularly corporate taxes, along with large-scale deregulation, could also be inflationary in the long term. By boosting sentiment among businesses and consumers, these measures are likely to spur greater capital investment and consumer spending. While some market participants believe artificial intelligence could increase productivity and potentially reduce inflation or even trigger deflation – “which might be the case in the future,” according to Leroux – he points out that substantial investment in infrastructure is required before such benefits are realized. “That infrastructure investment itself could drive inflation, as it represents a massive wave of capital expenditure that will be inflationary,” he explains.  “What’s more important than Trump is inflation. He must combat it, not exacerbate it with policies that create an inflationary environment,” Leroux emphasizes.

“What’s more important than Trump is inflation. He must combat it, not exacerbate it with policies that create an inflationary environment.”

Frédéric Leroux, Head of Cross Asset at Carmignac.

Believing Inflation is Transitory is a Mistake

During the inflationary wave triggered by the COVID-19 pandemic, central bankers, including Jerome Powell, were quick to label inflation as transitory, attributing it to supply chain disruptions. Leroux believes they couldn’t have been more wrong. “These individuals focus primarily on analyzing the economic and business cycles, but they overlook the structural forces that extend beyond the cyclical trends,” argues the Deputy CIO of the €34 billion French boutique. “Globalization and global trade have been significant drivers of low inflation over the past few decades,” recalls Leroux. “But now, due to COVID and renewed geopolitical tensions, we’re seeing a shift toward reshoring strategic production. This will inevitably lead to higher costs,” he asserts.

“For 40 years, demographics, global trade, geopolitics, and work ethic all acted as disinflationary forces. These same factors will provide a tailwind for the next 15 to 20 years.”

Frédéric Leroux, Head of Cross Asset at Carmignac.

“My view is that these structural trends, which operate above the macro level, are far more important,” concludes Leroux. “For 40 years, demographics, global trade, geopolitics, and work ethic all acted as disinflationary forces. These same factors will provide a tailwind for the next 15 to 20 years, just as they previously acted as a headwind to inflation for four decades,” he adds. As a global fund manager, his job is to anticipate the macro picture before others. And while inflation might not be at 2022 levels right now, he’s watching out and ready to position the portfolio accordingly.