As the dust settles from the election of President-elect Donald Trump, the focus moves to the economic effect of his policies.
And there, the picture is short on detail.
Markets initially welcomed the prospect of a Trump-led administration slashing US corporate and personal tax rates, cutting regulation and kick-starting a wave of infrastructure and defence spending-led stimulus, which would boost jobs and consumer spending and lift US economic growth (and thus world economic growth). A stimulus on that scale would likely bring inflation back into the picture and send US interest rates, and the US dollar, rising.
The independent Committee for a Responsible Federal Budget argues that Trump’s plans suggest he will borrow a further US$5.3 trillion, and increase national debt (currently at US$14 trillion) from 77 per cent of gross domestic product (GDP) to 105 per cent of GDP. Trump’s campaign claim was that US economic growth would rise from 2 per cent a year to 3.5 per cent a year.
The fiscal policy boost would likely help to end the three-decade bull market in bonds, and stimulate the stock market.
So far, so good.
But the incoming President has also threatened to impose tariffs on foreign goods and has pledged to renegotiate or scrap the United States’ free trade agreements, including the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP).
The latter directly concerns Australia: signed in October 2015 between the US, Australia, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Brunei and Vietnam, the TPP created the world’s largest free-trade area, covering 40% of the global economy.
But the wider threat of reduced global trade on the back of Trump’s protectionist policies – particularly, crimping China’s (and Asia’s) strong reliance on trade and exports to the US – would not be a welcome development for Australia. Trump has proposed a 45% tariff on Chinese goods coming in to the US: our two largest trading partners, the US and China, grappling in a tariff war would not be good news.
Despite these two conflicting potential outcomes, the stock market reacted positively to the Trump win.
The initial surge on the Australian stock market reflected hopes of higher commodity prices on the back of Trump stimulus. The bulk miners BHP Billiton (up 10.5% since the election), Rio Tinto (up 12%) and iron ore producer Fortescue Metals (up 16%) all benefit from higher commodity prices, as do copper producers Oz Minerals (up 11%) and Sandfire (up 14%), nickel producer Independence Group (up 15%) and nickel producer Panoramic (up 33%).
If the Australian dollar does fall against the US$ as a result of Trump’s policy mix, that is even better for the big miners, because they report their financial results in US$.
Also in this group are CSL, Woodside Petroleum, Newcrest Mining, Amcor, News Corporation, QBE Insurance, Oil Search, Brambles, Computershare, James Hardie and ResMed. A weaker A$ against the US$ helps boost their earnings.
Any rise in the US$ versus the A$ would also benefit companies with significant percentages of their revenue coming from The US, such as Westfield Group, Mayne Pharma, Treasury Wine Estates, Macquarie Group, CSR, Cochlear, Aristocrat Leisure, Hansen Technology, News Corporation, Twenty-First Century Fox, Sims Metal Management, Orora, Sonic Healthcare, SomnoMed, Henderson Group, Ansell, Adelaide Brighton, GWA, SDI, Navitas, Bega Cheese, Macquarie Atlas Roads, Incitec Pivot and Orica.
The construction and building materials stocks were also front and centre as the market first thought of stocks that could benefit from a US infrastructure boom. James Hardie (up 7.4%), Bluescope Steel (up 18.5%), Boral (up 8.8%), plumbing group Reliance Worldwide International (up 7.4%) and Fletcher Building (up 5.6%) have all been bid up on this theme.
Smaller companies such as Eden Innovations (EDE), which has developed a new form of concrete said to offer increased strength and durability over traditional concrete, and aerial mapping specialist Nearmap (NEA), which is taking its proprietary high-resolution aerial imagery technology to the US market, could also benefit from increased spending on US infrastructure. Eden Innovations is up 25% since the election, while Nearmap is up 6%.
Generic drug maker Mayne Pharma (MYX) is up 17% since the election: Mayne gets 87% of its revenue from the US, but it is unclear what the Trump plan is for generic drugs, and the water is muddied by the fact that just before the election, Mayne Pharma became part of a US Department of Justice investigation into two generic medicines – one of which, Doryx, represents more than 40% of Mayne’s earnings.
One clear winner on the ASX could be shipbuilder Austal (ASB), which holds more than $US5 billion worth of contracts to build advanced aluminium warships for the US Navy. Shipbuilder Austal (ASB) has surged 19%, to $1.80, since the election on the back of Trump’s plans to boost the size of the US Navy from 280 ships at present to 350 ships, a 14 per cent lift on the current 30-year shipbuilding plan.
At Austal’s US shipyard in Mobile, Alabama, it has ten ships under construction for the US Navy: in September it won a $434 million contract for the design and construction of another two. The two additional vessels grow Austal’s extensive order book to more than $3.3 billion and extend Austal USA’s contracted production schedule into 2022. Austal managing director David Singleton has said that the Trump’s plan to expand the navy was of “considerable interest” to the company.
Sydney-based composite-materials specialist Quickstep Holdings Limited (QHL) is also on a tear after the election, up 14.3%. At its Bankstown facility in Sydney, Quickstep makes advanced carbon-fibre parts for aircraft: in February 2011 Quickstep signed a long-term agreement with Northrop Grumman Corporation to make parts for the F-35 Lightning II (Joint Strike Fighter) aircraft, which will be flown by the Royal Australian Air Force (RAAF) as well as ten other air forces.
Quickstep makes 21 different parts for the JSF program: the supply agreement is worth up to $700 million to the company, over 20 years. At peak production rates, Quickstep says revenue from the JSF contract will reach $40 million a year.
In September, Quickstep exceeded a manufacturing rate of 100 parts per month for the first time in September 2016, with 108 parts made, compared with 590 parts completed during the previous financial year. This confirmed the company’s capacity and capability to meet further JSF ramp-up. There is just one problem – President-elect Trump has spoken of his dissatisfaction with the JSF program, which is years behind schedule and, at US$400 billion, the most expensive weapon program in US history. Trump has been reported as wanting to “fire” the F-35, possibly reinstating the F-22 Raptor program in its place.
President-elect Trump has also pledged to ignore the Paris climate accord, agreed by almost 200 countries including the US at the end of last year, and to scrap President Barack Obama’s proposed curbs on greenhouse gas emissions from power plants.
These policies are likely to support coal-fired power generation: Trump’s “America-first” energy plan will also seek to unlock the US’ vast shale resources, including opening up more federal lands for leasing, and potentially fracking operations. This will see gas power competing with coal in the US.
There is a substantial population of ASX-listed stocks operating in the US oil and gas sector that could benefit from a focus on local production, including Elk Petroleum (ELK, 6.6 cents), Empire Energy (EEG, 1.7 cents), Strike Energy (STX, 7.9 cents), Incremental Oil & Gas (IOG, 5.3 cents), Freedom Oil & Gas (FDM, 8.6 cents), Sacgasco (SGC, 6.9 cents), American Patriot Oil & Gas (AOW, 8 cents), Australis Oil and Gas (ATS, 25 cents), Sundance Energy Australia (SEA, 17 cents), Austex Oil (AOK, 5.3 cents), Sun Resources (SUR, 1.2 cents), Samson Oil & Gas (SSN, 0.5 cents), Austin Exploration (AKK, 0.5 cents), Entek Energy (ETE, 0.6 cents), Red Sky Energy (ROG, 0.1 cents), Black Star Petroleum (BSP, 0.3 cents) and Target Energy (TEX, 0.1 cents). LNG Limited (LNG, 58.5 cents) could be another.
There is a smaller group of ASX-listed players in US coal, but Paringa Resources (PNL, 47.5 cents) has the Buck Creek thermal and coking coal project in Western Kentucky, Attila Resources (AYA, currently suspended), has the Kodiak coking coal project in Alabama, White Energy Company (WEC, 6.9 cents) has the Mountainside Coal operation in Kentucky and Buckskin in Wyoming, and County International (CCJ, 1.2 cents) has coal projects in Wyoming and is proposing to build two coal export terminals, one in the US and one in Canada.
All share prices and data as at 11 November, 2016.
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