Saturday 3 December 2016

Will investors come up Trumps under the Donald?

Amid predictions of a record run for the US economy, some stocks will suffer

Published 27/11/2016 | 02:30

Donald Trump. Photo: Reuters
Donald Trump. Photo: Reuters

Stock markets in the US could hit new records under Donald Trump's presidency and its economy could be in for one of its best runs yet - these are some of the predictions from Deutsche Bank experts, less than two weeks after Trump's victory.

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Although stock markets initially fell when it emerged that Trump had defied the polls to win the presidency, markets then turned around fast - on the expectation that Trump will boost spending, cut taxes and reduce banking regulation.

The S&P 500 - a stock market index which includes the 500 largest companies in the United States - could hit new highs under Trump's reign, according to Deutsche Bank's chief US equity strategist David Bianco. The S&P 500 stood at 2,198 last Monday. "We're more confident now that the S&P 500 will reach 2500 in 2018 before suffering its next bear market," said Bianco in a note published about a week ago. By the time Trump takes up office in January, the S&P 500 is likely to reach the 2,250 mark, Bianco predicts.

At the heart of Bianco's forecast is his belief that Trump could be about to preside over one of the longest economic expansions recorded in the US. That economic expansion could last for more than 10 years, according to Bianco. If he is right, Trump's presidency could mark the beginning of one of the longest periods of economic growth in the US yet.

Investors are under-appreciating the "much higher chance now of a long lasting economic expansion that rivals the 10-year US record," said Bianco. Bianco believes that a cut in the US corporate tax rate - as promised by Trump - and any increase in the profits of US banks will lead to a "big boost" in the earnings per share (EPS) of companies listed on the S&P 500. This would be good news for investors in US shares - a high EPS usually brings a high stock price.

Of course, Bianco's predictions may be wrong and it will take time to see exactly what impact Trump will have on stock markets, the US economy - and indeed, the wider world economy.

"The big question is whether Trump will be able to deliver on a lot of the promises he has made on the campaign trail," said Brian O'Reilly, head of global investment strategy with Davy. "Should Trump increase government spending on health, infrastructure and so on, that could be a game-changer for people's investments."

Winners

Trump has made some wild promises throughout his election campaign.

These include a vow to 'transform America's crumbling infrastructure' and create thousands of jobs in construction, steel and manufacturing. The shares of big US building materials and industrial companies, cement and steel businesses, and companies exposed to the building of roads, bridges, ports and airports in the US are expected to do well if he lives up to this promise.

In Trump's plans for his first 100 days in office, which he outlined last week, he said he would "cancel job-killing restrictions on the production of American energy, including shale energy and clean coal". So investors with shares in US energy may also do well under Trump's reign - as long as they have their money in sectors favoured by the new US president. Trump's views on climate change have already stoked concern among environmentalists - so investors in green energy could lose out while shareholders in coal companies and other fossil fuel makers gain.

Trump has very ambitious plans to boost the US economy - though there are huge questions about how he will afford them. "Whether it's producing steel, building cars, or curing disease, I want the next generation of production and innovation to happen right here, in our great homeland: America - creating wealth and jobs for American workers," said Trump in his 100-day plan.

So investors in big US drug-makers, such as Pfizer and Celgene, could do well under Trump.

The fate of US car makers isn't as clear cut. Trump has promised to create more jobs in the US for those who build cars - but any move to impose tariffs on countries such as Mexico (as has been suggested by Trump) could hit the US automobile industry hard. Many US car makers depend on open trade with Mexico where production often takes place.

Inflation is likely to tick up if Trumps succeed in boosting the US economy. "Big cap stocks linked to commodities could do well if inflation goes up," said Peter Brown, founder of Baggot Investment Partners.

"So the likes of Shell, BP and Rio Tinto could do well. Commodities are cheap and will be the big winners if we get inflation and a president who will spend his way out of trouble."

Meanwhile, with a December rate hike in the US looking increasingly likely, those with shares in the US financial sector could be in an enviable position. Banks tend to benefit from rising interest rates so investors with shares in big US banks - such as JP Morgan, Bank of America, Wells Fargo - could do well. So too could those who have invested in the big US life assurers, such as MetLife.

Losers

Of course, there will be many investors who will lose money under Trump. Emerging market shares look vulnerable.

Bond investors - particularly those with money in long-dated bonds - will be big losers if inflation picks up. So too will those who are keeping their money on deposit.

The election of Trump has created a huge amount of uncertainty in world stock markets. "Not only has he never held an official post before, but many of his policy proposals were only partially fleshed out or changed through the campaign," said Jeremy Lawson, chief economist with Standard Life Investments.

If Trump presses ahead with some of his more radical plans, many investors could find themselves in the firing line.

"The risk with Trump is that if he starts to put tariffs on Mexico, China and so on, that will wipe out any good which he does," said Brown. "It would cause a very severe market correction. Tariffs will cause mayhem globally. They would be bad for global growth, trade, emerging market companies and banks. I would expect everything on the market to go down if that happens. However, I don't expect Trump to do anything radical."

Let's hope so.

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