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Saturday 10 December 2016

Are investors in for a Trump honeymoon?

People may make money from cement and drugs under his reign, but others will lose

Published 13/11/2016 | 02:30

A woman walks past an advertisement featuring a cartoon of US President-elect Donald Trump at a currency exchange store in Sydney, Australia. Photo: David Moir/Bloomberg
A woman walks past an advertisement featuring a cartoon of US President-elect Donald Trump at a currency exchange store in Sydney, Australia. Photo: David Moir/Bloomberg

A Donald Trump honeymoon could be on the cards for many investors over the coming months - despite the shock waves sent through stock markets last week when it emerged he had been elected president of the United States. This honeymoon could last for as long as two years, according to some experts.

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Investors with shares in big drug-makers, US banks, and international construction, cement and steel companies are set to become some of the biggest winners of the Trump honeymoon - if it materialises and lasts. However, there will also be plenty of losers.

Although stock markets fell in early trade last Wednesday after Trump defied the polls with his victory, markets then turned around fast. The reason for this is that Trump may herald an end to the austerity which has dominated global politics for the past seven years, according to Peter Brown, director of education with the Institute of Investment and Financial Trading in Dublin.

Brown said: "The world has been cutting back on spending since 2009."

Trump has promised to cut personal and corporate taxes, and to embark on big infrastructure projects. "Such policies are expansionary - they lead to growth, jobs and inflation," Brown added. "Initially these sort of policies are very positive for stock markets, the US dollar and commodities. That's why the likes of copper, iron and silver did well last week."

The big question for investors is what will happen in the coming months and years. "Will we get a two-year Trump rally, or will the markets not believe him?," Brown said. "My initial impression is that we will get a Trump rally. The markets will give him the benefit of the doubt. They will take the view that Trump is going to throw off the hair shirt and go for it.

"There could be a bit of a honeymoon period for stock markets. So if you are in stock markets, stay where you are. The US dollar looks good so if you are in US stocks, leave your money there."

The fate of investors from here will depend on the policies Trump pushes through while in power. Brian O'Reilly, head of global investment strategy with Davy, said: "We don't see a massive bull market with Trump but stocks may go up over the next three to six months as he announces some of his policies. Some areas of the market will do better than others."

Winners

Trump made wild promises in his election campaign, including a vow to "transform America's crumbling infrastructure" and create thousands of jobs in construction, steel and manufacturing. The shares of big building material firms and industrial firms are expected to do well if Trump lives up to this promise. The shares of the Irish building materials group CRH soared to a nine-year high last week. CRH is the largest producer of asphalt, which is largely used to pave highways, in the US.

Another share likely to get a boost from increased infrastructure spending is that of the US equipment giant Caterpillar. "The shares of construction, cement and steel companies - and companies exposed to the building of roads, bridges, ports and airports - are likely to benefit from any uptake in infrastructure spending," O'Reilly said.

Pharmaceutical and biotech shares should do well too because Trump has indicated that he will take a more hands-off approach to such companies than would have been the case if Hillary Clinton had taken the reins, according to David Holohan, chief investment officer with Merrion Stockbrokers. Clinton planned to tackle high drugs prices and make prescription drugs more affordable for Americans. Trump, however, has been less vociferous on the topic and has even promised to scrap Obamacare (a law introduced by Barack Obama to make health insurance more affordable for Americans). The shares of drug-makers Pfizer, Mallinckrodt, Celgene, and Roche all surged when news of Trump's victory emerged.

During his election campaign, Trump suggested that he would seek to replace the chair of the US central bank, the Federal Reserve. Any move to do so is likely to trigger uncertainty across financial markets. He also wants to reduce regulation in the banking sector. Such reduced regulation could give US bank shares a lift, according to O'Reilly. "An expanding economy and high inflation is also good for the banks," O'Reilly added. Wells Fargo and JP Morgan are some of the US bank shares which could do well under Trump's reign - if he manages to bolster the US banking sector.

Losers

Should Trump instigate trade wars, as he has suggested, stock markets around the world could collapse. "The biggest risk with the Trump election is if his policies are too protectionist," O'Reilly said. "If you start seeing a drop-off in trade elsewhere [as a result], it could tip the rest of the world into recession."

Trump's pledge to impose tariffs on Chinese and Mexican imports could see investors in emerging market shares lose money. Andrew Milligan, head of global strategy with Standard Life Investments, said: "Emerging market assets look vulnerable. Such assets would be affected by fears over tariffs - but also a higher dollar and higher borrowing costs."

Even if Trump doesn't follow through on his tariff plans, the shares of international manufacturing firms could take a hit from the uncertainty his election has created.

"Even in a benign trade policy scenario, firms with extensive global value chains or who rely on migrant labour would face a more uncertain future," Milligan added. "Potentially vulnerable are manufacturing firms with extensive global supply chains, and leisure and hospitality companies - because of any increased labour cost pressures amid greater immigration restriction."

Trump's lack of empathy for renewable energy could see those with shares in green energy lose money, while shareholders in coal and other fossil fuel companies may gain.

His plans to cut corporation tax rates in the US could see investors in Irish and Irish-based companies lose out, as such tax cuts could damage Irish firms. One of Trump's top advisers warned last week that a flood of companies will leave Ireland to return to the US under the new president's tax regime. Should this happen, many Irish jobs could be lost - and our economy weakened.

Inflation is expected to pick up under Trump. High inflation is trouble for bond and deposit investors. With interest rates so low, many such investors will lose money if inflation rises. Those saving into a pension need to be careful their exposure to bonds is not too high. Ian Quigley, director of investment strategy at Investec, said: "We are increasingly of the view that we have seen the end of the great bond bull market, which has lasted around 35 years."

It will be a while before it becomes clear exactly what impact the election of Trump will have. "The message for investors is to stay liquid [that is, have the ability to move easily between investments without penalty]," Brown said. "Don't tie yourself into any investments for five years or more."

Absolute return funds are worth considering in the wake of Trump's election, according to Brown. These funds seek to make a positive investment return regardless of stock market conditions. Do your research before choosing an absolute return fund though. Some of these funds are not delivering on their promise to make a positive return for investors.

Be careful with gold. It may not be the safe haven investors thought it was when they poured money into it straight after the election result. "When the dollar is strong, gold doesn't do that well," O'Reilly said. The initial rush into gold has been reversed as investors have taken a more measured view of what Trump can achieve, according to Milligan. He said: "Higher growth, inflation and profits expectations are being priced into markets - rightly or wrongly, many see Trump as a businessman who will want to support business."

If Trump is good for business, he should be good for investors who have their money in the right places. Only time will tell.

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