Investing in Donald’s world

As Donald Trump completes his surreal rise to the top of American politics, many investors are left wondering what impact his policies will have on where they should put their money

We frequently hear in the media the phrase ‘the markets don’t like shocks’ – and you could argue that there have been few bigger shocks than Donald J Trump’s US election victory. 

The Republican candidate was written off at various points in the campaign, having seemingly alienated women, Hispanics, Mexicans, Muslims, environmentalists and those with disabilities. But as we know, the opinion polls got it wrong, with Trump becoming the 45th President of the US.

So what was the initial reaction from global stock markets and currencies to Trump’s rise to power?  Given the fact that his ‘protectionist’ policies are bad news for European companies trading with the US, it was little surprise that following the election, the Stoxx Euro 600 Index lost close to two per cent after opening in London. 

However, this negative reaction was nowhere near as marked as the eight per cent fall post Brexit. In terms of currency movement, the dollar fell 2.5 per cent against the euro immediately after the result. 

Once again, the reaction was on the negative side, but hardly Armageddon. Martin Bamford, Chartered Financial Planner with Informed Choice, isn’t overly surprised by the reaction.

“We didn’t see the sharp falls prompted by the UK’s decision to leave the EU – probably due to the realisation that Trump in office is less dramatic than many parts of the mainstream liberal media made it out to be.”

Kevin Boscher, CIO at Brooks Macdonald International, agrees that the market reaction to the Trump victory wasn’t mass panic and that by the close of business on the first day, many of the early losses had been reversed.  

Meanwhile, Mark Waters, Investment Manager at Skerritt Consultants, points out that there was a 40 per cent probability that Trump would win, so there was always a reasonable chance of his success. “What shock there was didn’t last long – the fall only lasted about six hours!” 

It was widely reported that the market had priced in a Clinton victory, but as Bamford points out, the muted investor reaction since the result was announced suggests that the pollsters are no longer trusted by investors. “In a two-horse race, either candidate can claim victory and polling methodologies have seen their weaknesses exposed once again,” he says.

Retail investors

So what does a Trump presidency mean for retail investors and where should the clever money be? Bamford suggests that Trump in the White House is probably good news for pharmaceuticals, infrastructure and consumer stocks. He adds: “Trump is likely to be a tax-cutting President and this should result in more consumer spending in general.”

Boscher takes a similar line. “I think that in the US, sectors such as healthcare and pharmaceuticals will benefit. Healthcare companies had been sold off on the back of Clinton’s policies. Trump is talking about repealing Obamacare, so that could have a positive impact on healthcare companies.” 

He also points to the proposed $800bn spend on infrastructure, which could benefit construction and engineering stocks. Then there’s the Trump pledge to loosen regulation for the banks, which may make this sector more attractive to investors. 

Technology is another area that Boscher believes will increasingly attract investor attention. “Productivity has been poor in the US,” he says. 

“The only way to increase it is through investment in technology. If there’s higher wage growth – a possible consequence if migrant worker numbers are forced down – and a rising dollar, this all puts pressure on companies to boost productivity in order to improve margins. 

“I also think that if US companies are encouraged to bring back cash to the US – linked to Trump’s corporate repatriation plan – then a decent percentage of that will go into technology.”

Boscher argues that technology stocks look reasonable from a valuation perspective and points to the fact that many US companies haven’t invested enough in tech since the financial crisis, so investment now is more necessity than choice. 

Quite whether Trump will be able to force firms such as Apple to open massive productions plants in the US remains to be seen – with experts citing issues with the supply chain as a major barrier.

The mining, biotech and automotive sectors are also areas that Waters believes are well placed to benefit under a Trump administration. The new President has pledged to support US coal mining, and his protectionist stance could be good news for US car manufacturers looking to sell in the domestic market. 

Good for business?

Trump was positioned during the campaign as a ‘pro-business’ candidate, but will real business incentives emerge or were pre-election promises based more on rhetoric than substance? Bamford thinks it depends on how effectively Trump garners support on Capitol Hill. 

“It will be interesting to see if he can get his planned corporate tax cuts through the US political system, but if he can then it could be a boom time for business in the US.”

Waters believes Trump could be good for business in the US but he suggests that big questions remain unanswered. “Infrastructure building may well start soon but how big will the spending really be? Where is the money going to come from? We are probably looking at huge borrowing, and the Republicans who control Congress and the Senate may put checks on this,” he says.

It’s also hard to envisage how Trump will be able to put more money into people’s pockets through tax cuts while at the same time increasing infrastructure and defence spending. As Waters points out, Trump appeared to be willing to say whatever was needed to get elected – now it’s a case of trying to deliver, which is much harder.
    
Looking at the bigger picture, are we likely to see the value of the dollar continue to fluctuate markedly and. if so, what impact might that have?

According to Waters, despite the immediate fall in the dollar post-election, the currency is more likely to see an upward trajectory in the future, assuming Trump’s policies are implemented. 

“I wasn’t surprised that the dollar rose again shortly after the initial fall because Trump’s policies are stimulus-based,” says Waters. “There will probably be inflation in the US economy, with interest rates likely to rise and therefore the dollar rising on the back of that. It’s also easier for the dollar to rise as global currencies are weak – QE in Japan and Europe is actively trying to weaken currency.” 

Currency manipulation might prove to be a worry under a Trump administration, as Boscher explains. “If he imposes tariffs on Chinese imports, then China could respond by deflating their currency intentionally, which could be damaging.” 

And Trump didn’t get off on the right foot with China by making a telephone call to the Taiwanese leader – something that many felt was an enormous gaffe and demonstrated the incoming President’s lack of political experience.

Currency aside, the prospect of protectionism itself is a concern. “I suspect that the construction of a moderate Republican house will mean much of his protectionist rhetoric will be toned down,” Boscher suggests. 

However, even if his protectionist policy isn’t softened, it might prove counter-productive anyway. “Many consumers will base their purchases on quality and price and not necessarily on whether something is US-built,” says Boscher.

How to play the US

Even if Donald Trump’s ‘Americanism not globalism’ mantra scares the wits out of you, as the world’s biggest economy the US is still likely to figure on most investors’ radars. 

Given some of The Donald’s hawkish comments in recent months, shares in defence and arms manufacturers could prove a profitable hunting ground. But for most investors wanting to diversify and reduce risk, a collective fund makes more sense. 

Bamford, however, is not a big fan of managed US funds. “UK investors have historically struggled to get value from US equity markets through active fund management,” he says. 

“The best approach seems to be investing through an index tracker fund, with broad exposure to US equities at the lowest possible cost.” He namechecks the Fidelity Index US fund. 

Waters favours a different tack altogether, getting exposure to the US via sector funds rather than generalist US funds. “Our preference is for specialist funds in areas like cyber security, healthcare and biotech. There are specific exchange-traded funds that track a cyber security index or a global robotics and automation index. You’re investing in many US names but not in a US fund.” 

Making predictions is difficult as Trump himself represents something new (and not necessarily good) for US politics. Could the billionaire champion of the blue-collar worker and the self-proclaimed anti-establishment figure confound all his critics and leave the US economy in a better state than he found it? 

“I think he will prove an agent of change, but it’s too difficult to see now what the outcome of his policies will be or where, if at all, he might make compromises,” Waters says.  

Bamford isn’t convinced that Trump will even last the course. “I think the next few years will be interesting for US politics. My prediction is that Donald Trump will not complete a full four-year term. 

“He seems to have been most interested in becoming President, rather than actually being President. Investors should start to think about what President Mike Pence could mean for the markets in the not-too distant future.”