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Investing After Trump

So much for market concerns with a Trump Presidency.

After an initial global equity market freefall during Asian trading as the election result became clear, sentiment then turned on a dime when, in his victory speech, “post-election” Trump appeared much more moderate than he sounded during the election campaign.

That initial glimpse of President-elect Trump gave investors some hope that he may not be a crazy as his antics during the long-election campaign seemed to suggest. Maybe it was just an act to win over the disheartened blue collar “rust belt” communities after all?

Further tantalising signs that Trump might end up quite rationale are also evident. Famed investor Carl Icahn, who incidentally supported Trump, responded to news that global markets had slumped on his victory by leaving the Trump’s celebrations early to wager a $US1 billion bet on stocks. It obviously paid off the next morning.

Another backer of Trump is US venture capitalist Peter Thiel, who has previously suggested that Trump should be taken seriously, but his precise policy proposals during the election campaign should not be taken “literally”.

Noteworthy also is that many of Trump more outlandish policy proposals – such as building a wall across the Mexican border, imposing punitive tariffs on China and banning Muslim immigration – where quickly taken from his website the morning after this victory.

And Trump was very well behaved and respectful when meeting President Obama at the White House only two days after his win.

Of course, all this could change once Trump finally grabs control. Indeed, unless Trump only want to be a one-term President, he will still need to enact some policies to appease the white working class “deplorables” that elected him.

So while a wall might not be built, and an all-out trade war with China seems unlikely, he will likely toughen up on immigration and trade policies.

From an economic perspective, however, probably the most important aspect of Trump’s platform is the significant fiscal expansion it assumes. Indeed, Trump want to slash personal and corporate income taxes and boost spending on infrastructure and defence.

Beyond Trump’s apparent post-election reasonableness, it’s the prospect of significant fiscal expansion and deregulation that also has Wall Street excited. Trump has pledged to boost economic growth to around 4%, and his spending plans are boosting the outlook for infrastructure construction companies and defence contractors. His promise to cut regulation in the health care, energy and banking areas has also boosted stocks in these sectors.

Of course, one market not rejoicing at Donald Trump is that of bonds. The abrupt change in investor sentiment following the Trump victory suggest the Federal Reserve remains on course to raise interest rates next month (the market probability of which at first dropped to 50% but then rebounded to 85%). More generally, fiscal expansion which helps boost economic growth – not to mention the budget deficit – is also not a positive for bonds.

A stronger growth outlook and rising interest rates is also supportive of the US dollar. As regards equities overall, however, the outlook is more mixed. With price to earnings valuations still high and corporate earnings relatively sluggish, rising bond yields will make it even harder for Wall Street to sustainably rally much beyond current levels in 2017 – unless, of course, Trump’s policies really do succeed in boosting economic growth and corporate earnings.

I’m still cautious with regards to equities, however. While sentiment is better than feared with a Trump Presidency, the fact remains America has already enjoyed a relatively long economic expansion and the labour market is getting tight. And Federal Government debt is already quite high at 100% of GDP, compared to only around 30% when Reagan tried similar fiscal expansion in the early 1980s.

The bond market might yet rain on Trump’s parade.

That said, the Trump ascendancy does offer sector rotation opportunities. As noted above, sectors likely to benefit from his policies include health care, construction and banks. Australian investors can gain easily exposure to the global health care and banking sectors on the ASX through the DRUG and BNKS exchange traded funds (ETFs). Those sectors less favoured at those that will be hurt from rising bond yields, namely listed property, utilities and (already build) infrastructure assets.

View More Articles By David Bassanese

David is one of Australia's leading economic and financial market analysts. His is Chief Economist with BetaShares, and an Economic Advisor to the National Institute for Economic and Industry Research (NIEIR). His has held former roles as senior commentator with The Australian Financial Review, Macquarie Bank interest rate strategist and Federal Treasury economist. He is also author of the online e-book, TheAustralian ETF Guide.



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