The stocks to soar as America enters a new phase in history
Thursday 17 Nov 2016 Author: Tom Sieber

The market is so far taking Donald Trump’s shock victory in the US presidential election in its stride but you need to start thinking NOW
about the next major events that could move markets. These are the forthcoming European elections and the US interest rate decision in December, in our opinion.

Shift to the right

The election of Trump provides the ultimate demonstration of a wave of right wing populism spreading across the West which was previously reflected in the surprise Brexit vote in June.

It also suggests investors can have little clue ahead of time on the result of an election as most polls gave Hillary Clinton a material lead heading into the 8 November vote.

This has implications for the looming votes in several parts of Europe and suggests investors should not get complacent.

There is an Italian referendum on constitutional change, a French Presidential election and a Federal election in Germany scheduled within the next 12 months.

Anti-estabishment vote

‘An anti-establishment vote, despite what opinion polls say beforehand, should not surprise markets although we believe such victories are still likely to create market volatility given the uncertainty it will create for the policy environment,’ says Derry Pickford, co-head of asset allocation at Ashburton Investments.

In the US, Trump’s cabinet picks may also offer some clues into how the maverick candidate intends to govern once in office. It may provide some jolts to the market through the remainder of the year and up to his inauguration on 20 January 2017.

Finally, the Fed Funds futures market is a reliable indicator of market expectations for US interest rates.

Ahead of the polls closing on 8 November, expectations for a US interest rate hike in December were above 85%. They fell below 50% as the shock result came in; they have since moved back above 80% as we write this article.

Is Trump good for the markets?

We rightly warned not to take the result for granted in our feature previewing the US presidential election in late October. We were also correct to say there would likely be a rally in equities post any Trump-related sell-off.

Overnight as the final votes were counted, the FTSE 100 was looking at a 4% plunge based on futures markets and taking its cue from a rout in Asian markets overnight. It didn’t fall that much.

Surprisingly the UK blue chip index only dipped 2% at market open before swiftly recovering and actually closing higher. The S&P 500 was also in positive territory at the end of its first session with Trump president-elect.

A Clinton win, constrained by a Republican Congress, was seen as the preferred outcome as it would have represented a continuation of the status quo.

On the flip-side, many observers expected a sell-off to at least rival Brexit in the wake of a Trump victory. So why didn’t it materialise?

Tax cuts and infrastructure spending. Trump looks likely to be pro-business, delivering lower corporation taxes and cutting red tape. He has also pledged to spend up to $500bn on infrastructure projects. This could boost growth and employment and has a positive stance towards the energy sector.

Speculation a December rate cut would be shelved. This now appears less likely but a feeling the Fed might retreat from a rate rise may have provided some initial support to the markets.

Markets unsure how to price in Trump win. Perhaps wary of making snap judgements after their recent experience of the Brexit vote, investors may be holding fire as they wait to see what a Trump presidency means.

Main Feature

Top Trump picks

Although the markets appear comfortable with Trump for now, in the longer term a series of unfunded tax cuts would likely swell the US government deficit and potentially store up risks for the future.

As a guide to which UK stocks might do well under a Trump administration we now update our views on the stocks, funds and other assets we said to buy if Trump got in.

We believe the relief rally in healthcare stocks has now played out. As such, we think the easy money has been made in terms of the removal of Clinton’s price cap threat.

We are more positive on the medium-term boost Trump might provide to energy, defence and infrastructure-related stocks – that’s where you should keep buying stocks and funds.


American Flag in front of The White House in Washington D.C. Photomontage. SEE MY OTHER PHOTOS & VIDEOS from USA:

Markets bet on post-Trump paradigm shift

Market moves since Donald Trump’s surprise US election win, for now at least, indicate markets are starting to factor in higher economic growth, inflation and interest rates in the US and potentially the rest of the world.

Trump looks set to implement a dual government stimulus package through both increasing government spending and cutting taxes, a move likely to increase US government debt in the short term.

Yields on US government bonds have increased as a result and investors appear to have flooded cash into cyclical stock market sectors including industrial metals producers and construction stocks.

Investors may be repositioning for a world where governments around the world take a more sanguine approach to deficit-financed public spending projects.

Spend, spend, spend

Fund management outfit Ruffer has long argued increased government spending would become the lever to which developed countries would ultimately turn in order to stave off low growth
and deflation.

Ruffer runs a number of funds including the Ruffer Investment Company (RICA) vehicle listed on the stock market which are more or less a one-way bet on this theme.

Chairman Jonathan Ruffer has long argued that fiscal stimulus would ultimately be the weapon of choice used by authorities to stave off deflation.

Sinking raw material prices and a lack of employee wage power have, until recently, seen most developed countries experience falling prices, says the veteran investor.

Ruffer refers to weak copper prices and the declining membership of the UK’s TUC union as examples of why inflation and wage growth have been weak in recent years – and why government spending may be the solution.

Deficit spending

‘What copper and the TUC can’t do today, those weasel words “fiscal expansion” can do – and there is now an intellectual framework for this to happen,’ wrote Ruffer in an April commentary.

‘Those who are fearful of it always go to caricature, Weimar and Zimbabwe, but a country only has a currency which becomes worthless when it is bankrupt – it can always change direction (back to austerity) when profligacy becomes too expensive.

‘But it is still a dangerous thing to do and will need another bold government to follow the lead of the recently elected Trudeau government in Canada in implementing it.’

Few would have expected the next ‘bold government’ to throw off the shackles of fiscal discipline to be a Trump-led US administration.

To be clear, Trump has not yet assumed office and policy did not feature heavily during the election campaign.

But market reaction to the president-elect’s early rhetoric appears to indicate investors believe he will follow through on his spending pledges.

Global shift

Shinzo Abe is also embarking on expansionary government spending policies in Japan and even austerity-ridden Europe has been loosening the purse strings. In the UK, chancellor Philip Hammond is backing off a commitment to return the government budget to surplus by 2020.

Free-wheeling government spending might provide a boost to equity markets: though not in the places which have driven the bull market cycle of the last five years.

Expensive defensives, so-called bond proxies, like the big tobacco companies, utilities and consumer staples stocks like Unilever (ULVR) and Diageo (DGE) have been under pressure.

Banks, which benefit from higher interest rates, and cyclical industrial stocks like Ashtead (AHT) and CRH (CRH) could have further to run if the early Trump playbook is sustained.

Keep calm, stick to the basics and look through the noise

It is very hard to determine exactly what the lasting impact of the Trump presidency and the wider right wing populist movement will be on stocks.

The best advice for a long-term investor is to adhere to core investment principles and not to get too caught up in the background noise of day-to-day volatility.

Focus on the fundamentals

The best way to limit the risk of loss while retaining the ability to achieve capital gain and income is to buy quality assets at prices which fail to reflect their true worth.

A share represents fractional ownership of a company but you should approach an investment as if you were buying the whole firm.

This will enable you to focus on the business fundamentals and not get too caught up in short-term price action.

By focusing on the fundamentals you should also avoid getting carried away by the latest investment fads and the risk of getting caught up in speculative bubbles or over-reacting to short-term sell-offs.

Asset prices collapse when bubbles burst. Even a 30% drop in an investment portfolio growing at 7% a year is going to take a long time to claw back those losses.

Equally, if you sell when investors are panicking you could crystallise a loss which could have disappeared when the market calms down.

Stick to your investment goals

You must have a clear idea as to why you are investing. For example, are you looking to boost your pension pot, fund your child’s education, or take the holiday of a lifetime?

Having a well defined goal should give you discipline and focus. It should help influence your targeted return, determine an acceptable level of risk and dictate your time horizon.

Don’t put all your eggs in one basket

It is important to diversify. If your portfolio is concentrated in just one or two holdings the impact of a sudden market shock could destroy its value.

By investing in different areas you spread risk and should hopefully not suffer a damaging loss if there is a freak occurrence such as a stock market crash, natural disaster or political upset.


Stethoscope with national flag conceptual series - United States of America

WHAT THE EXPERTS SAY


Head of Liontrust’s multi-asset team
John Husselbee

‘In terms of our portfolios, we did not feel it necessary to “Trump proof” ahead of the election as we already felt US equities were expensive.

‘We will look for any bargains as the dust settles’

‘We continue to reiterate our long-term philosophy and approach: we run target risk portfolios and focus on the long term, with fundamental valuation driving our tactical asset allocation.

‘We have had cash in the portfolios for a while and will look for any bargains as the dust settles. Multi-decade returns have shown that, whichever political party in ultimately in power in the US, the economy and stock market tend to carry on regardless.’


 

WHAT THE EXPERTS SAY

Bettina Edmondston, global investment analyst,
Saracen Global Income & Growth Fund (GB00B3XPLG55) 

‘Going into the (US) election we had the most cyclically positioned portfolio in decades. We started selling bond proxies in the staples space about 18 months ago as we believe these shares are too expensive for the growth they offer. We also expected bond yields to rise. This theme has started to pay off and we expect it to gain momentum in the coming months.

‘Our exposure to healthcare has been increasing since the start of the year and especially in recent weeks. Pharmaceutical shares have not reacted like other defensive bond proxies. The main reason was the concern over a Hillary Clinton presidency and a consequent crack down on drug pricing. However, we were less worried about a potential political intervention as Clinton would have not had the support from the Senate or the House of Representatives.

‘The point of having a process is to stick to it’

‘Industrials will benefit from increased infrastructure spending, which was a policy for both candidates and should happen not just in the US but also in Europe.

‘We have a long-term investment horizon and forecast out five years, which helps us identify things that the market is not looking at today. Our analysis is bottom up and we try to see through the noise.

‘It is important to stick with your process and not panic. We believe our investment portfolio is full of fundamentally strong and attractively valued investments that will deliver regardless who is running the largest economy in the world. We only slightly tweaked our portfolio in the aftermath of Brexit and we are not intending to change it now after the US election. The point of having a process is to stick to it. This has proved to be a profitable approach for us.’

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