davidmbelvederesharescomau 1 Comment
Trump’s victory has had a profound effect on not just US markets but global stocks and bond markets. In Australia some stock segments are up dramatically, whilst bond and bond type stocks (for example real estate funds, utilities and infrastructure companies) are being de-rated. Whilst there has certainly been a lot of commentary about the causes, this is our take on the reasons and why the trends of the last 8 years have now changed.
After years of increasing regulation and higher taxes, business confidence in many industry segments was on its knees and private investment has been stagnant. Whilst politicians have been  talking  the positives of greater consumer protection  and green energy, they weren’t acknowledging  the negatives of higher energy costs to manufacturing and the debilitating effects of greater and greater regulation. Companies around the world have not been investing in expansion and banks aren’t lending to business projects. Hence economic activity has been stagnant and there has been enormous under employment around the world.
Hardly anyone gave Trump a chance of winning the US Presidential Election and no one thought he could win in a fashion that provides the Republicans control of both houses of parliament. Media concentrated on the personal side and not policy whilst voters clearly did the opposite. He is pro-business and investment and hence American jobs. He may be morally questionable but his policies are offering hope (aka jobs in political terms) to large parts of the US that have had 8 years of economic quagmire, and subsequently the same to investors in equities. Consider the economic potential of these three policy changes-
1. Infrastructure
It is estimated that the US has been under-investing in infrastructure for 30 years, so there is no shortage of excellent projects that will improve the productivity of the country, not to mention create a lot of traditional construction jobs.  The question is always how to fund them. US global companies have large sums held outside the US and have been discouraged to return the funds due to tax impediments. Trump has offered these companies tax credits which will offset the tax liable if the funds are invested in US infrastructure.  As most infrastructure projects like roads are tolling, banks are happy to lend the majority of the construction cost. The funds coming onshore and invested to get the tax credits will provide the balance. Hence Trump has a very real chance of funding the US $1 trillion infrastructure projects.
2. Support for the traditional energy sectors
This will include coal and fracking for oil and gas. This will create serious jobs and have the effect of lowering the cost of energy in the US. Given a major cost of manufacturing is energy it will have the effect of making US manufacturing far more globally competitive.
3. Banks
Trump has openly stated his outrage that very few Bank execs were punished for their actions leading to the GFC. However he is pragmatic and knows as a developer, the banks need to be encouraged to lend to traditional industry and to new projects. He has already stated he believes the overriding restrictive policies placed on banks globally have gone too far and he will lighten the reigns. This policy change will be extremely positive for economic activity as more businesses receive expansionary funding.
Individually any of the three policies are positive for US economic activity and far greater than other economic policy that has occurred for years. Collectively they are huge. As investment increases and wages grow the multiplier effect is even greater.
The global positives are that he has rewritten the political landscape. It will make politicians far more aware of the need to provide plausible policy to encourage jobs and wage growth across the country. There are a number of  elections and issues in Europe and Trump will have to back down on his aggressive trade threats, but there is a real upside to global growth now that hasn’t been there since the 2008 GFC, and that is very positive for business.
A stronger US economy will be clearly positive for Australian businesses with operations in the US. Further, as the largest economy in the world any US pickup has an impact on trade and economic development globally. The uptick in our resource stocks is a prime example of the market believing demand for base metals such as Iron ore and copper will increase.
Australian Portfolio Positioning.
Our clients trust us to manage their Australian share portfolios and in doing so it is our role to be overweight sectors we believe in, and to avoid sectors that either look to have headwinds in their business or have a valuation based risk. Over the last few months the overall All Ordinaries Index has declined and risen again. Beneath this, there have been dramatic changes in the values of different sectors. Simplistically, banks and the large resource stocks are up around 20% while infrastructure and real estate type companies (referred to as Bond proxies) are down 20%. Other darling sectors such as Telcos have been hit even harder on valuation questions.
Recognising the change in global sentiment and markets is imperative. We cannot pick daily movements so we look to what sectors will have tailwinds and hence investor demand, and which will not. Accordingly we continue to hold our banks and the majority of holding in the large mining companies as they are still under owned and globally there is a scramble to gain exposure. Conversely all things being equal the bond proxies will have bounces but it is likely that rates will be heading up and therefore their medium term trend will be down.
The sectors that are catching our attention are now the cyclicals which would benefit from a growing US and international economy when they are priced for low growth. Stock selection and timing have become the new imperative to portfolio management.
If you would to discuss portfolio management in more detail, please send us an email or call.

David Manchee
Belvedere Share Managers

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