Trump trade: investors turn to Wall Street as Dow Jones takes off

Australian investors are pouring money directly into the US market as the ‘Trump trade’ takes off on Wall Street.

Australian investors are pouring money directly into the US market as the ‘‘Trump trade’’ takes off on Wall Street.

As international trading volumes soar by more than 60 per cent at online brokers — and the Dow Jones index this week passed the crucial 20,000 point benchmark for the first time — playing the rise of Trump in global markets this year will mark the difference between winning and losing.

In fact, as fund management results from 2016 start to trickle through the market, it is clear investors who missed the first upswing phase of the Trump trade suffered hard as sharemarkets jumped in the last two months of 2016.

In the year ahead there will be no excuse for underestimating the Trump trade. The broader ambition of the freewheeling Trump administration to double US GDP from 2 to 4 per cent is the biggest call in the market.

But to play in the space Australians will have to take on currency risk, which adds another layer of danger to any new investments.

Over the last 12 months currency risk was minimal. In fact, the difference between hedged returns at 9 per cent and unhedged returns at 8 per cent for local investors in foreign stocks last year shows that currency was not a key factor — but nobody can accurately forecast how the Australian dollar will fare in months ahead.

In attempting to capture US-driven gains but offsetting currency risk, Australian investors may well run parallel defensive moves which might come from higher holdings in cash (where interest rates are expected to rise) or even gold. But be aware of the risks. While the price of gold has had a strong start to the year, it has dropped sharply this week. The price of the precious metal has now lost 2.6 per cent in three days to $US1187.79.

In short, the Trump trade is a risk play … but one which many active investors will believe is worth taking.

How to invest

For Australian investors who wish to actively take part in the Trump era the pathways are open — the rise of locally listed ETFs (index funds listed on the stockmarket that trade as shares) and the ease with which we can now trade US stocks from Australia makes almost any move possible.

Over the past two years Australians have opened up their exposure to US markets well beyond the traditional pathway of managed funds that concentrated on the US towards a range of ETFs and direct shares.

In the most direct channel, directly purchasing US shares online, local investors have been most interested in US-based tech titans — Apple, Facebook, Google (listed as Alphabet). Local investors investing offshore mainly use the online operations of the four banks or specialists such as Saxo or Interactive Brokers. Though transactions costs are coming down, overall costs relating to foreign stocks remain higher than local stocks.

Clay Carter, a veteran Australia-based US stock picker who is now as a senior research analyst with Macrovue says: “Australian investors are already familiar with the US and they know to expect price growth but a lower dividend than they are used to on the ASX.”

Carter says that Trump’s double desire to cut US corporate taxes and actively protect domestically focused American companies elevates a range of new industrial stocks as targets for Australian investors: “These are the companies that are right in the sweet spot,” he explains.

Nathan Walsh, general manager of Nabtrade, says a dimension of the serious lift in US trading by local retail investors is a desire by Australians to get more diversification into their portfolios. The online broker has reported a 62 per cent lift in international volumes in the two months to December 31 against the same period a year earlier — the big increase reflects both profit-taking after Trump’s election and the surge of Australian investors moving into Wall Street.

Separately, Nabtrade has also seen a 20 per cent lift in ‘‘cash on platform’’ over the past 10 weeks as investors line up to trade on Wall Street when opportunities arise in the weeks ahead.

According to Nabtrades Walsh, “Australian investors have always been strong on the tech leaders, and looking ahead I think we will see them actively examine wider opportunities — US manufacturers, healthcare, energy and consumer stocks will all come into consideration.”

For those less willing to risk money on individual US stocks, ETFs offer a basket of stocks and these products are also attracting investors.

In fact it is possible to find funds that reflect Trump’s bias towards domestically focused US stocks. Leading US fund manager David Kotok of Cumberland Advisers this week singled out one of the leading US small cap ETFs — IJR — suggesting stocks within this product are not as exposed to offshore US issues as the blue chips of Wall Street.

Not every investor of course is willing to take the effort or risk of buying individual US stocks and many will rely on the skills of a fund manager such as Platinum or Magellan to take them on the ride with Trump and make profits when the chance arises.

However, for investors who wish to remain directly in control of their own money ETFs now offer exceptionally low fees of perhaps 0.04 per cent and are provided on the ASX by major players: Betashares, Blackrock, ishares, State Street and Vanguard.