Trump in the driving seat: where should you steer your cash?

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The world is busy trying to digest the shock outcome of the US election and the possible implications of Donald Trump’s presidency both for the US economy and more broadly for global prosperity.

There are a huge number of unknowns at this stage of the policy honing process, but the bottom line is that Trump is a protectionist who has promised to put America’s interests first.

In terms of the economy, he wants to dismantle international trade agreements, reduce Chinese imports, invest massively in infrastructure and slash taxes to ‘make America great again’.

He has also talked about easing back on the regulatory environment for the banking and financial services sector, and is much more interested in expanding US energy production than in controlling climate change.

These and other measures, if they are followed through, are likely to provide a strong economic boost for the US – and indeed, since election day the S&P 500 index has seen none of the slump suffered by other indices globally.

But such a boost would likely cause inflation to rise, which could mean greater pressure on the Federal Reserve to raise interest rates in the medium term.

In the UK and elsewhere, there has been a less upbeat response as uncertainty has set in over the wider global implications of Trump’s vision of a better world for corporate America.

The FTSE 100 has fallen after an initial ‘relief’ surge (though it remains almost 7% up on the year as of 12 November).

Meanwhile, the Hargreaves Lansdown Investor Confidence index fell 13% in November, posting the lowest score in its 21-year history.

‘So far in 2016 investors have been buffeted by a commodity collapse, the Brexit vote, and most recently the US election, so it is little wonder they are feeling cagey right now,’ comments Laith Khalaf, senior analyst at Hargreaves Lansdown.

The markets most at risk as a result of Trump’s victory are the emerging economies, which had been enjoying a strong rally this year. Exporters are set to lose out if America follows through on its anti-globalisation, anti-free trade rhetoric, while borrowing costs will be impacted if US interest rates rise. China and Mexico could be particularly vulnerable.

Against that, emerging markets could benefit from a weaker dollar if Trump’s expansionist fiscal policies are put into practice.

So what should investors be considering in these exceptionally uncertain times?

In the short term, volatility can be expected in US markets, given the current lack of clarity on policies. However, the Investors Chronicle reports the view of Iain Scouller of broker Stifl that stock markets will soon refocus on corporate earnings rather than politics.

‘While there is limited visibility on the policies of a Trump presidency, the proposals to cut some corporate taxation and personal taxes may be received positively by stock markets. US interest rates are probably also likely to remain lower for longer, with exceptionally loose monetary policy continuing,’ says Scouller.

US industries most likely to benefit in the medium term include banks (both from regulatory easing and in the event that interest rates rise), commodities and construction firms (from infrastructure spending), energy companies, defence-related businesses (Trump has also talked about boosting spending on the US armed forces) and pharmaceuticals, which no longer have to worry about Hillary Clinton’s threatened clampdown on drug pricing.

Investors who think there may be opportunities ahead could bear in mind the Association of Investment Companies’ recent revelation that investment trusts in the Global sector have an average 36% exposure to US stocks, while in the Global Equity Income sector it’s 22%.

Trusts with high US allocations include the Martin Currie Global Portfolio trust, with 59% in American markets and Securities Trust of Scotland with 56%; the popular Scottish Mortgage trust has almost 50% of assets in the US.

An alternative approach would be to follow the philosophy of Fundsmith’s Terry Smith. As he recommended in the Telegraph at the end of October, it’s safer to ‘stay focused on the “known knowns”’ – good companies in businesses you understand – than trying to second-guess ‘known unknowns’, for example events such as Brexit or the US election.

Smith’s Fundsmith Equity fund has returned 22% over 2016 (to 12 November) against the Global sector average of 18%. Over five years it has returned more than double the Global sector.

Although emerging markets in general are widely expected to suffer as a result of Trump’s negative stance on global trade, Claudia Calich, manager of the M&G Emerging Market Bond fund, sees a number of possible beneficiaries among emerging markets.

‘There are several countries that are relatively closed economically, such as India and Brazil, that have relatively low trade or immigration ties with the US. Countries within Eastern Europe are much more dependent on Europe than the US for their exports or financial channels,’ she says.

She also points out that Russia may benefit from the result if the US ‘starts easing financial sanctions’.

Focused exposure to these less vulnerable economies could be achieved through a single-country or regional fund; for example Jupiter India has delivered impressive performance over various timeframes, with gains of almost 40% over the year to 1 November. But this is a course suitable only for long-term investors prepared for a bumpy ride.

Jason Hollands of Tilney Bestinvest suggests four funds that could benefit from the complex mix of forces likely to have effect over coming months.

1           T Rowe Price US Smaller Companies: Smaller companies overall are more domestically focused than the large, international businesses that dominated the S&P 500 Index. T Rowe Price has been investing in US small-caps since the 1960s and this fund is incredibly diversified with over 200 holdings.

2          First State Global Listed Infrastructure: Among infrastructure equity funds, this has a high weighting to US firms with 59% of the portfolio invested in North America. It could benefit from plans to upgrade creaking US infrastructure include roads and bridges, as well as improved prospects for the domestic energy industry as it has exposure to energy infrastructure.

3           AXA Framlington Health: This long established specialist fund is 71% invested in North America, with negligible exposure to Asia or emerging markets, and therefore might continue to benefit from a less interventionist approach on drug pricing.

4           Investec Enhanced Natural Resources. This fund invests across commodity markets and therefore could capitalise on demand for raw materials that arises from increased infrastructure spend, but it is important to bear in mind that increased US demand needs to be weighed against a slowdown in demand from China. A useful feature is that this fund can also take short-positions.

Finally, bearing in mind that the coming months are likely to bring greater clarification on Trump’s currently ‘flexible’ position across many issues, there is an argument for simply holding some cash for a while.

 

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