US Elections 2016

Chris Weston of CMC Markets highlighted the possibility of a Trump victory several weeks ago due to his interest in how the bookies looked at Brexit. The weight of money on bets implied that Britain would vote not to leave the European Union, but the number of bets indicated that there would be a BREXIT. His thinking was that the US elections may be similar because at the time the weight of money on bets was for a Clinton win and the higher number of lower value bets indicated that Donald Trump would be the USA’s 45th President.

Having heard and looked over his acceptance speech, I find that there are a number of noteworthy points.

The Donald Trump that we saw yesterday was vastly different to the one we saw on the campaign trail. He presented himself as a statesman and was inclusive, encouraging all Americans to work together in “rebuilding our nation” and even said that America looks forward to working with friends.

He said that “we are going to fix our inner cities” and “rebuild of infrastructure”, so this leads me to look at Australian building materials companies that have large operations in the US – CSR Ltd (CSR) and Boral Ltd (BLD). He added that “we will put millions of our people to work as we rebuild it”, so that implies more discretionary spending which would be positive for Westfield (WFD).

Whilst there has not been a detailed economic plan, President–elect Trump intends to “double our growth and have the strongest economy anywhere in the world.” We will have to see more detail to see where that might impact or benefit Australians.

Australia's top 10 export destinations for goods and services in 2014

From the campaign it appears that the trade agreements will be scrapped or renegotiated. AUSFTA is still in place but it seems that the Trans-Pacific Partnership will fail and new proposals and trade-offs will eventuate.

The USA is Australia’s 4th-largest export market, accounting for 5.7% of total exports in 2014.

The Department of Foreign Affairs and Trade (DFAT) provide this table on their website.

A Table depicting Australia's Trade and Investment Relationship with United StatesNotes to Australia's Trade & Investment Relationship

At a quick glance, Australian Companies that may benefit are:

Company

Product and opportunities

Treasury Wines (TWE)

Has 49 vineyards and 10 wineries which may sell more product if the society is more affluent.

BHP Billiton

Produces oil, petroleum and natural gas but a glut is keeping prices low. However, if oil prices rise due to escalation of the Middle East crises, the USA will rely on domestic producers for energy independence. Further, we may see increased demand for metals if USA
manufacturing activity improves.

CSR Ltd (CSR)  

Bricks and pavers used in housing construction.

Boral Ltd (BLD

Produces cement, bricks, boards and pavers used in housing and infrastructure construction.

Amcor Ltd (AMC)  

Packaging requirements should increase as
manufacturing grows.

Cochlear Ltd

If changes are made to Obamacare we may see further increases in sales.

One of the biggest concerns how President-elect Trump provides the fiscal boost; my guess is that it will be by increasing debt. This raises the question of bond yields and the yield curve. So I believe that we will see an increase in short-term borrowing by banks who will offer longer-term loans in order to capture returns. The Federal Reserve will also come into play and, depending on growth, employment and inflation, may raise rates in May 2017. In Australia, we may yet see one more rate cut as the under-employment numbers remain high. The stocks that will be marked down domestically are the ‘bond proxies’ such as AREITS, infrastructure stocks and hybrids due to the rising bond yields. I nevertheless remain mindful that AREITS typically continue to perform in the early stages of a rising yield environment, reflecting the growth and ability to pass on costs that characterises these periods.

Obviously, America will have to clamp down on Chinese dumping of low quality steel but they will aim to do so without triggering a trade war. Other impacts will be the possibility of a strengthening USD which will be positive for global growth. A lower A$ will be positive for Australian exports. Similarly, the Yen and Euro are likely to weaken too. Therefore, we should also see equity markets outperform.

So, I suggest that investors invest wisely in companies that have proven track records and stable management. There will be volatility and that should present buying opportunities. Remember, the ASX is not a fruit market and you can’t pick out ‘what’s good today’. Rather look to take an equity stake in the orchard operator!

 

Gail Gadd
Specialist Financial Planner
Authorised Representative
Lifespan Financial Planning Pty Ltd

 

 

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