United States Presidential candidate Donald Trump likes to be seen as a “disruptor” in politics: a radical change agent, who can break through the moribund political class. But a Trump victory could disrupt global equity markets and Australian companies with US operations.
Sportsbet this week offered odds of $3.50 for a Trump win in the November election. Democrat nominee Hillary Clinton was $1.36. Her odds are shortening after she beat Trump in the first presidential debate and as news emerged this week that Trump (legally) avoided paying up to US$916 million in taxes.
Those betting odds flatter Clinton. The US election is still tight and the possibility of a Trump presidency – and the effect that could have on world trade and globalisation – cannot be discounted. A lot can happen in US politics between now and November 8.
Trump’s unpredictability, political incorrectness and his success in narrowing Clinton’s lead in the poll in the last few months (the gap is a bit over 3 points) shows he is no long shot to win the Presidency. His shift from mainstream policies makes this US election a more significant market event.
Markets fear a Trump victory would spark another “Brexit”-style event, when Britain voted to leave the European Union. Global equities tumbled and Australian stocks, notably wealth managers with large British operations, were initially hammered.
A Trump or Clinton victory adds a greater risk premium into markets. Both leaders want the US government to spend more and Trump in particular wants a shift away from globalisation.
His isolationist policies, assuming they ever got through the US Congress, could limit US economic growth in the long run. However, his supporters counter that Ronald Regan’s election as President in 1981, although viewed suspiciously by markets, sparked one of the great US share market bull runs, as business and consumers became more confident.
Either way, investors need to keep a close watch on the US election, particularly if polls remain tight and Trump retains his core support. If Clinton’s lead in the polls grows – much depends on the second presidential debate next week – markets might be less volatile around the election. However, a tight contest will have short-sellers ready to exploit a Trump win or narrow Clinton victory.
Traders and active investors should ensure portfolios have sufficient cash holdings going into the election. Increasing exposure to gold – a safe haven during heightened market volatility – is another strategy if Clinton’s poll lead narrows and Trump regains his momentum.
Long-term portfolio investors should consider key sectors affected by a possible Trump win and possible Australian stock winners and losers. For the record, my money’s on Clinton (just) and I do not expect the US election to be another Brexit-style event.
Also, the US accounts for less than 10% of Australia’s exports. Our key exports to the US (beef, meat and wine) are not in the firing line for Trump’s trade agenda. I’d be more concerned about Australian manufacturing companies that export to the US.
The effect of Brexit on ASX-listed wealth-management stocks, such as Henderson Group (HGG), was clearer cut. Uncertainty over the UK economy weighed on investor demand for UK equities and hurt Australian wealth companies with significant UK operations.
Nevertheless, Brexit shows the market’s twitchy readiness to dump Australian stocks with decent UK exposure and overreact. The same could be true of the US election if a Trump victory looks likelier. Here are five sectors and potential stock and Exchange Traded Fund (ETF) winners and losers.
1. Healthcare
Healthcare is a key political divide between the Democrats and Republicans. Clinton wants to preserve and strengthen the controversial US Affordable Care Act, the so-called “Obamacare”. Trump wants to repeal it and replace it with another system, but has given few details on what that looks like.
Australian pathology business Sonic Healthcare (SHL) earned 22% of its FY16 revenue in the US. A Trump win would be a headwind for US hospitals and medical-service suppliers such as Sonic, given uncertainty around health rebates and funding.
Some brokers have nominated Sirtex Medical (SRX), a provider of liver-cancer treatments, as another Australian stock that could be disrupted by a Trump victory. I’m less concerned about Sirtex given it operates in a niche field.
CSL would be one of a few Australian healthcare winners from a Trump victory if the Republicans create free-market drug pricing. But the powerful US pharmaceutical industry bitterly opposes the importation of cheaper prescription drugs and Trump would have to overcome many vested interests for the legislation to be passed. Any benefit to CSL would be a long way off.
Chart 1: CSL (CSL)
Source: Yahoo Finance
2. Infrastructure
Trump’s big-spending infrastructure plan is a key part of this strategy. Even Clinton wants to increase US spending on roads, rail, ports and airport by US$500 billion (in direct spending, loans and guarantees) over five years. Trump has hinted at a “trillion-dollar plan”.
A US infrastructure-spending boom would boost Australian building stocks with US exposure: James Hardie Industries (JHX) and Boral (BLD). Plumbing group Reliance Worldwide International (RWC) is another. Infrastructure spending could boost US equity markets overall, and other markets that follow it, such as Australia, if it lifts business confidence.
But infrastructure projects have long lead times, spending programs run over many years and a big increase in infrastructure investment is likelier in economic downturns. The effect on James Hardie and Boral is marginal in the short term, but higher US infrastructure spending would be an earnings tailwind in the medium term. Watch for Australian building stocks to get the biggest price spike if Trump wins the election.
Chart 2: James Hardie Industries
Source: Yahoo Finance
3. Defence
Trump wants to increase military spending to boost troop levels and the number of ships and aircraft. That could benefit small-cap Australian ship builder Austal (ASB), which counts the US Navy as a key client. Austal supplies the Littoral Combat Ship for the US Navy.
Austal looks undervalued for long-term investors, regardless of US election dynamics and possible military spending increases. It earns 85% of its revenue in the US and in September won a $434 million contract to design and build two Expeditionary Fast Transport vessels for the US Navy – extending Austal’s US contracted work to 2022.
A pro-military Trump government would be another small positive for Austal. Investors seeking large-cap exposure to higher US military spending should look at offshore-listed stocks Lockheed Martin, Boeing, Northrop Grumman and Raytheon.
Chart 3: Austal
Source: Yahoo Finance
4. Gold
A Trump victory would be better for gold than a Clinton win. The immediate effect would be higher market volatility and rising demand for the precious metal as a safe-haven asset.
Further, a Trump Presidency could limit the scope and speed of future interest-rate rises – another positive for gold, which tends to fall as the US dollar rises, and vice versa. Trump says he will “most likely” replace US Federal Reserve Chairman Janet Yellen if elected.
Trump’s position on the benefits of low US rates has changed a little. He initially argued that the Fed kept US rates too low for too long. But his recent rhetoric on the dangers of a high US dollar supports the view that he favours a gradual increase in US rates.
Long term, Trump’s isolationist trade policies, should they come into effect, could further exacerbate currency/trade wars and increase demand for gold as a safe haven.
I don’t agree with US equity strategists who argue that a Trump victory could fuel a 40% rally in gold: the effect is likely to be much smaller, but worth watching for gold bulls.
Buying an Exchange Traded Fund over gold bullion, such as the ASX-quoted ANZ ETFS Physical Gold ETF is the simplest way to gain low-cost exposure.
Chart 4: ANZ ETFS Physical Gold ETF
Source: Yahoo Finance
5. US small companies
Ever the entrepreneur, Trump’s policies should stimulate the US small business sector. His protectionist ideologies are more damaging for US multinationals that rely on offshore markets than for US small companies more domestically exposed.
However, Trump’s negative views on immigration and talk that he could send illegal workers back to their home country could bump up wage costs in the US hospitality sector. His plan to return manufacturing to the US could also pressure wage costs in small businesses.
On balance, a Trump victory favours smaller US companies over larger ones. Buying an ETF over the US Russell 2000 index, the key barometer of US stocks, appeals.
Chart 5: US Russell 2000 index
Source: Yahoo Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. All prices and analysis at Oct 5 2016.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
