Trump’s inauguration is the biggest investment event since the GFC

The Trump era demands that investors who want to make even average returns move up the risk spectrum.

Sharemarkets all over the world have already inaugurated Trump as great “reflator” of global investment markets.

The inauguration of Donald Trump this weekend marks the single most important investment event since the global financial crisis almost a decade ago. Whether President Trump will ultimately be good or bad for overall returns we don’t know, but so far the signs are very good indeed.

If fact, whatever you think of Trump and his team of pro-business politicians, their arrival on the scene has already helped to top up your super fund’s performance in the 12 months to December. Two surveys released earlier this week both pointed to the post-US election “pop” in the markets after early November as the key driver in bringing in better-than-average returns of 7.7 per cent for the median growth super fund last year.

Better still our super funds rode high on a late burst from the sharemarket, with Australian shares finishing the calendar year with an 11.8 per cent return.

Sharemarkets all over the world have already inaugurated Trump as great “reflator” of global investment markets. He is the personification of a new era where economic growth should return to centre stage, years of secular stagnation underpinned by artificially low interest rates should come to an end and investors — especially in so-called growth assets such as shares — are due to win again.

What does the Trump era require from the Australian investor? At the very least it means you must be in the market to catch this wave, sitting on the sidelines will almost certainly be expensive in the short term and crucially it means earnings growth rather than dividend income becomes the mantra for investors.

But putting investments on a growth setting has its own challenge ... quite simply it is riskier.

Taking a closer look at the performance of Australian super funds in recent times it is worth pointing out that the only category of super fund that has failed to meet its objectives over the last decade has been the so-called “all growth” option offered by the major super funds. If you had blindly put all your money into growth funds over the last 10 years, the upshot would be that your total returns (annualised) for the decade would be 4.7 per cent ... which sounds fine until you realise that balanced funds over the same period returned a marginally superior 4.9 per cent with much less risk attached.

Nonetheless, the Trump era is going to demand that investors who want to make average returns move up the risk spectrum and invest more in shares.

Under this scenario it is very likely that many portfolios — professional and private — will move towards a bigger stake in local and international shares balanced by cash holdings (which can expect higher rates) and perhaps gold holdings (theoretically a very strong hedge during times of volatility).

How might a typical Australian investment portfolio reset for reflation?

Professional planners warn against sudden major changes in portfolio settings but advise investors to steadily respond to changing circumstances. As ATO figures suggest SMSF investors regularly have about one quarter of their entire market-based investments in cash and another quarter in Australian banks stocks suggesting there is some serious resetting needed.

Here’s the picture for the three main sources of investment — outside of direct property — for local investors.

Shares

This year is expected to see a switch out of the so-called bond proxies which paid high income over the last few years in favour of growth stocks — that is stocks that can lift in price following stronger profits. If this moves takes off we will see lower returns from A-REITS (property trusts), utility style stocks such as Telstra and companies that have pivoted towards higher dividend policies at the expense of profit growth.

In turn, the market will reward profit makers. In the year ahead this category will almost certainly be dominated by selected mining stocks and stronger industrials.

in fact, our two mining majors — BHP and Rio Tinto — are already up more than 60 per cent over the last 12 months yet they remain priced at very attractive levels. Mid-sized export-orientated industrials are also expected to fire on all cylinders ... separately, it shouldn’t be a useful time for small cap investing.

Bank stocks stand somewhere in the middle between fading bond proxies and rising industrial profit makers. At current settings where their cumulative returns are potentially strong — thanks to last year’s indifferent stock performance — they are expected to benefit from bargain hunting.

There will also be extended interest in US stocks. However brokers expect some widening from the tech titans favoured by Aussie investors towards domestically focused US that which will most directly benefit from forthcoming tax cuts under Mr Trump.

Cash

Even with the very low levels of interest payment local investors endured in recent years, cash has still managed to perform relatively well. It is hard to believe but cash almost matched Australian shares in the decade to December 30 — shares made an annualised 4.4 per cent and cash made an annualised 4.1 per cent. The explanation here is the miserable returns from the sharemarket over that period; nonetheless the figures speak for themselves. Going forward, cash is widely expected to offer higher rates, consequently it should still rate as a way to hedge against any new risks in a more growth orientated portfolio.

Gold

Never to be underestimated, gold — specifically as a safe haven alternative to the US dollar — is on the radar once more. Mr Trump has already moved to talk down the US dollar in a move that breaks decades of White House protocol. Any further action from the US to try and devalue the US dollar will play straight into the gold price, which has already had its best session in two months when Mr Trump said the US dollar was “too strong” earlier this week.