Thursday, November 10 2016
The market initially reacted sharply as the likelihood of Trump victory increased. However the market settled down as realisation of the policy implications of a Republican controlled Senate drove the market. Below we analyse the expected market impact of a Trump Victory.
We had initially expected the market to prefer a Clinton victory given the greater certainty. However the markets have been weak over the past month and begun to factor in the uncertainty. Reviewing the policy agenda reveals a mixed outcome but overall an inflationary / growth driven agenda.
The longer-term impact on the market will be dictated by the performance of his economic policies. In terms of the major policy implications we need to consider Trump’s ability to get his policies through the Senate and the House. While these will be controlled by Republicans many Senators and Congressman will be hostile towards Trump and so it is not a foregone conclusion that his policies will pass. The economic policies will likely be influenced by Speaker of the House, Paul Ryan who sees economic management as one of his specialist areas.
Ultimately a number of questions are going to remain. Does a Trump victory impact confidence? Can Trump drive his policy agenda through both houses? Does he push policies that are negative for his own business interests such as more aggressive trade deals with Asia?
Key Economic agenda
It is safe to assume the trade agreement with the Pacific will not pass. However it is not clear that Trump will be able to pass more of his aggressive protectionist policies that harm US allies. This is the largest risk area from a Trump Presidency but also the area that he likely face the most opposition from other members of the Congress and the Senate. His policies in this regard are more closely aligned to left wing Unions than a conservative, free trade Republican Senator.
Trump plans to reduce corporate taxation to a rate of 15% (which was borrowed from Paul Ryan’s economic policies and therefore likely to pass the House and the Congress). The purpose of this reduction is to make sure that US multinational companies bring their funds back to the US and reinvest it domestically in the US economy. Tax cuts would be a positive for companies operating in the US (increasing earnings by 20%), and would be positive for the US$ as we would be likely to see cash repatriated to the US.
Infrastructure Spending to increase
There are plans to revitalise airports, roads and build a wall. The US corporate tax rates proposed within the Trump program would increase US private fixed capital investment in the US economy. We see the likelihood of greater funds being invested in the US as positive for infrastructure companies.
Defence spending to increase
While Trump does not have expansionist ambitions he has spoken to higher defence spending and this is aligned to Republican interests.
Less regulation of banks and healthcare and repeal of Obamacare is positive for banks and healthcare companies operating in the US.
Promote energy independence which will further support infrastructure investment in the US.
Higher Interest rates
Trump policies appear inflationary—lower tax rates, lower deregulation, higher infrastructure and defence spending. This is further enhanced if he is successful in forcing protectionist policies though. We believe this will drive higher interest rates over time.
US$ will strengthen on the back of repatriation of capital, and inflationary / growth policies. The uncertainty that he creates from a global perspective also leans towards a safe haven trade.
Higher risk premium
The markets are likely to adopt a higher risk premium to allow for the uncertainty that Trump’s rhetorical bluster provides. Will he damage US relations with Japan and South Korea? Will he start a trade war with China? Will he butt up against Putin? There are numerous uncertainties which will provide an overhang.
Global trade is on the decline and future trade deals will be under threat. This is a negative for Australia but potentially be offset by the resource intensive growth agenda in the US. Furthermore a growing US would be favourable to major exporters to the US such as Japan and South Korea (which would be helpful as they are major export destinations for Australia).
Wall Street to Main Street
One of the political consequences from the Trump victory as well as Brexit is that economic policies are likely to swing towards the masses. US manufacturing salaries have not increased faster than inflation for 30 years. Margins in the US are high and are likely to be squeezed. This can be fine if the top line is growing faster however we believe it favours buying quality companies which can pass on inflation to their customers.
Companies exposed to infrastructure spending such as Macquarie Group and Lendlease should be assisted by the infrastructure agenda that is being adopted in the US and by the likely adoption by other markets.
US Corporate earnings
Higher US corporate earnings as a result of the tax cut will be helpful for companies operating in the US.
The impact of a Trump victory is significantly lower risk than Brexit. We are not dealing with a leading nation having to unravel a complex economic agreement. Further the tax cuts will provide a significant boost to earnings and stimulus in the largest economy in the world. We see US earnings higher off the back of tax cuts however the impact on markets will be offset by a higher risk premium and higher interest rates which will impact the multiple.
Our portfolios are reasonably positioned. We have a high exposure to US exposed companies, are underweight stocks benefiting from lower interest rates, are overexposed to companies that benefit from infrastructure stimulus and remain invested in quality companies with pricing power. The main risk is the extent that the risk premium decline leads to a de-rating in growth stocks (where we do have an exposure) but many of these are the quality names with pricing power so we remain comfortable with the exposure.
This document has been prepared by DNR Capital Pty Ltd, AFS Representative – 294844 of DNR AFSL Pty Ltd ABN 39 118 946 400, AFSL 301658. It is general information only and is not intended to be a recommendation to invest in any product or financial service mentioned above. Whilst DNR Capital has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and you must make your own enquiries concerning the accuracy of the information within. The information in this document has been prepared for general purposes and does not take into account the investment objectives, financial situation or needs of any particular person nor does the information constitute investment advice.
Before making any financial investment decisions you should obtain legal and taxation advice appropriate to your particular needs. Investment in a DNR Capital individually managed account can only be made on completion of all the required documentation.