How domestic investors can profit from the Trump environment
Australian investors suddenly face a very different investment landscape with Donald Trump in power.
Put simply, the “hunt for yield” might finally be ending: the great investment favourites of the past five years such as blue chips and high-dividend payers could find themselves outpaced by shares that can offer what investors need most of all: improved profits and rising prices.
It is very early days in the low-tax “Trump era” — and there is every chance he could flop as a political leader. Yet the signs are already clear that Wall Street is bidding up traditional industrials, miners, even investment banks.
On the flip side the new US regime is set to potentially hamper world trade agreements, reverse the trend towards clean energy and load the dice in favour of US-based shares.
As Stephen Halmarick, chief economist at Colonial First State suggests, a full Trump agenda unleashed on global markets is going to be “highly stimulatory”. However, as economist Don Stammer points out, Trump will also push interest rates and inflation higher.
Playing the ASX
The outstanding stock opportunities in the local market would appear to be big miners — they were recovering strongly even before the surprise Trump win — in the medium term, at least.
Trump’s hardline conservatism on resources (he is literally pro-coal!) coupled with his plans to renew America’s ageing infrastructure is a boon for so-called “bulk” mining stocks.
Over the past three months both BHP Billiton and Rio Tinto have put on more than 30 per cent — that has to be seen against a wider S&P/ASX 200 that is virtually flat. Moreover, specialist miners such as the iron ore pure play Fortescue have been soaring — FMG has risen from $3 in June to $6.24 yesterday.
The miners are lifting off the back of higher commodity prices — which may move in any direction from here — but are unlikely to return to lows of a year ago. Iron ore is now more than $US70 a tonne — in the federal budget it was pencilled in at $US55.
A crucial factor in the leverage of the big miners to any significant lift in demand from a Trump-led infrastructure program is that costs have been significantly reduced in recent years.
The other major opportunity has to be ASX-listed companies with substantial US operations, offering local investors the prospect of US exposure without having to directly invest offshore.
Outstanding stocks here would have to be leading industrials where a substantial portion of revenues are booked in US dollars, such as CSL (40 per cent), Westfield Corporation (75 per cent) and Treasury Wine Estates (40 per cent).
The major miners with their commodity prices in US dollars would also be high on the list. Stockbroker Credit Suisse has nominated two favourites in this space — BHP and building products group Boral (25 per cent US revenues).
Playing Wall Street
Trump’s most immediate and direct effect will be on US-listed industrial stocks. In fact, with the backing of congress he has the potential to stoke investment markets in a fashion not seen since the Reagan-Thatcher era.
On Wall Street, the sectors set to win under Trump are infrastructure, industrials, pharmaceuticals, banks and biotech. In some cases, those sectors should benefit from so-called fiscal policy (plans to build roads, tunnels and bridges); in others, it is a case of having avoided what might have been tighter regulation, for example heavy industries and investment banks.
Losers could be technology stocks — especially those with substantial overseas operations in low-tax environments.
There has already been a sell-off in the big name “tech titans” much favoured by Australian investors such as Facebook, Amazon, Netflix and Google (the so- called FANGs). Apple and Microsoft might also face new headwinds.
The outlook is also deteriorating for alternative energy stocks, Trump having long complained about subsidies that may be supporting high-profile companies such as electric carmaker Tesla.
Wealth editor James Kirby hosts a live investment Q+A at www.theaustralian.com.au every Wednesday at 12.15pm.
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Australian investors suddenly face a very different investment landscape with Donald Trump in power: in the months ahead the dominant themes that have restrained the market since the GFC — low rates, low growth and low inflation — could well be reversed.