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magazineUS Election: Brace Yourself
The US presidential election on 8 November 2016 matters to UK investors. It could have a significant impact on the value of stocks, bonds, currencies and commodities.
Economic strength – as influenced by the president’s policies – will also drive interest rates in the US. They are, in turn, highly influential on interest rates elsewhere in the world.
We believe a Trump victory would trigger a short-term sell-off in global markets as investors are not currently pricing in this scenario. We then foresee a sharp recovery rally in US equities and select UK stocks. Longer-term, Trump wouldn’t be good for the US economy, in our opinion.
A Clinton victory may prompt a muted reaction, but certain sectors would rise or fall as we discuss later in this article.
Impact on your ISA or SIPP
The UK’s stock market, as represented by the FTSE 100, could be heavily influenced by the choice of US president.
Many of its constituents do business in the country or have their products or services priced in US dollars.
The US has trade agreements with numerous countries around the world including the UK. Any amendments to trade deals and/or higher import tariffs could eventually have a negative impact on UK companies who do business in the US.
It might take a long time implement any changes so there is no rush to avoid FTSE stocks which do business in the US.
What to buy and sell
Construction and defence businesses could be winners under a Trump or Clinton presidency, so buy BAE Systems (BA.). Both have pledged to spend more on infrastructure – so likely beneficiaries would include plant hire firm Ashtead (AHT) and road building materials group CRH (CRH).
Clinton would be good for companies involved in energy efficiency as she seeks to make utilities better run. Her pro-renewables stance is bad for oil producers. Her plans to push up the minimum wage would hurt profit margins at companies with large numbers of staff such as retailers and restaurant operators.
A Trump win may favour US domestic banks, oil and mining service firms and technology companies. Possible beneficiaries on the UK market include Hunting (HTG).
An election victory for Trump could also benefit shares in drug companies – simply because Clinton’s threat of a price cap on medicines would have gone away. In that situation, buy Shire (SHP) or AstraZeneca (AZN).
Theoretically under Trump leadership you could see US equities rally once the initial result has sunk in. We’d buy UK funds, exchange-traded funds and investment trusts that have a large proportion of US equities in their portfolio. Good examples include BlackRock North American Equity Tracker Fund L Acc (GB00B7QK1Y37) and CF Miton US Opportunities B Acc (GB00B8278F56).
Finally, it would probably be worth holding gold as a hedge against Trump’s unpredictability.
Trump still has a chance
We do not believe that Donald Trump can be ruled out of the race, despite lagging in the polls, making deplorable comments about women and tabling allegations of voting fraud.
The shock Brexit vote in June has proved that opinion polls are not always accurate.
Hillary Clinton could potentially lose if Trump persuades sufficient numbers of blue-collar American workers to a) actually vote and b) vote in his favour.
Although much of his rhetoric can be dismissed as so much hot air, his pledge to cut corporate taxes could actually encourage businesses to expand and hire more people and the prospect of greater job opportunities would appeal to many voters.
Where next for markets?
A Clinton win may encourage the Federal Reserve to raise interest rates in the US, says ETX Capital markets analyst Neil Wilson. ‘That could suppress equities heading into the New Year,’ he comments.
The market isn’t pricing in a Trump victory at present – so he could trigger a shock-term negative shock in global stock markets if elected, in our opinion. That may be a short-lived event, just like the UK market reaction to the EU referendum.
Wilson believes a Trump win could dissuade the Fed from hiking interest rates in December this year, ‘which would support further frothy, central bank-led equity strength heading into 2017’.
(Click on table to enlarge)
Investors will want a bigger return
The equity risk premium is likely to shift higher if Trump wins. That’s the amount of return an investor wants to make from the stock market over and above the risk-free rate.
The risk-free rate is the return you can get from government bonds like gilts and treasuries. That’s essentially handed to you on a plate. The equity risk premium is the bit on top – think of it as your reward or compensation for taking the risk of investing in the stock market.
Asset manager Lombard Odier believes the equity risk premium would rise in the US – and more broadly – given uncertainties surrounding Trump’s political plan and the larger policy changes. It believes US treasuries will initially benefit from ‘safe haven flows’.
WHAT HAPPENS IF TRUMP WINS?
Shares go down, then up
Trump winning the US election would be positive for equities, believes Gero Jung, chief economist at Mirabaud Asset Management. ‘He wants to increase fiscal stimulus and he wants to decrease corporation tax to 15%. Trump also doesn’t want to change the national minimum wage, unlike Clinton.’
Those factors combined could, theoretically, give a boost the US economy. They could encourage corporations to invest more in their business as tax would be lower; in turn that could drive greater consumer confidence if employment prospects looked brighter.
Trump wants US companies to repatriate an estimated $1.5tn cash held overseas in order to avoid being hit with the 35% corporate tax rate. He has proposed to lower the tax to 10% and use the cash proceeds for capital spending and job creation.
Jung suggests consumer staples and the financial sector could prosper under a Trump presidency. ‘He wants higher interest rates which is generally better for banks’ profitability.’
Taxes and Tariffs
The IT sector could benefit from lower corporation tax levels and US materials stocks could prosper, believes Jung. ‘Trump wants stricter tariffs on Chinese imports, for example, and he wants to change export subsidies.’
This is protectionism – shielding the country’s domestic industries from foreign competition by taxing imports.
‘Larger fiscal stimulus, repatriation and protectionism should support the US dollar, particularly against the Mexican peso and China’s renminbi,’ says Sophie Chardon, investment strategist at Lombard Odier.
Trump seems eager for US companies to do all the work in the country. He also wants consumers to buy US-made products. This could drive up the cost of living as many products are imported from other countries into US because they are cheaper than domestic goods.
One would presume Trump believes that US manufacturers would be able to reduce costs through economies of scale. The more products they sell to the local market, the lower the overall cost of production. The consumer would only benefit if manufacturers passed on such cost savings through lower selling prices.
What the fund managers are buying
Jake Robbins, fund manager at Premier Global Alpha Growth Fund C Acc (GB00B6740K61), has been buying US domestic cyclical stocks ahead of the election. ‘They’ve underperformed for the last five years and I see value there now.’ Retailers Foot Locker (FL:NYSE) and American Eagle Outfitters (AEO:NYSE) are two examples of stocks Robbins has added to his fund.
A stronger economy would give the Federal Reserve a reason to raise interest rates. That would be beneficial for US domestic banks as their profitability should be higher. A rise in federal debt could also push interest rates higher.
The key flaw in Trump’s policies is the potential to significantly increase the federal deficit because of the massive cost of lost tax revenue.
‘We suggest Clinton’s proposals would likely be modestly stimulative in the short-run, but Trump’s proposals suggest a more uncertain outlook that include the risks of a boom-bust in economic activity,’ suggests David Page, senior economist at AXA Investment Managers.
UK STOCKS TO BUY IF TRUMP IS ELECTED
Construction/engineering
Trump and Clinton are pro-infrastructure spending. ‘We are encouraged by both presidential candidates’ commitment to increased spending on infrastructure,’ says Investec analyst Gerard Moore.
‘Clinton has outlined a $275bn five year plan which, in a blue sky scenario, could boost US construction spending by 5% per year.
‘Trump has indicated that this is a “fraction” of what’s required, but there is limited detail to his own $1trn proposal. Securing a funding plan for such an ambitious programme will be a challenge and influenced by the final make-up of the US Congress.’
BUY: Wolseley (WOS), National Grid (NG.), Hill & Smith (HILS), Ashtead (AHT), CRH (CRH).
Natural resources
Trump wants to restart all the coal mines, pump as much oil as possible and have plentiful gas flowing through pipelines. This would be good for oil and gas service companies and engineers in the short to medium-term, but bad for commodity prices. You should definitely look at suppliers of kit such as pumps and values to the US shale gas and oil operators as that industry looks to be a clear beneficiary of Trump’s policies.
BUY: Hunting (HTG), Wood Group (WG.), Weir (WEIR)
Defence
Both the Democratic and Republican presidential nominees want to raise the military spending cap, thereby creating a bigger defence budget.
BUY: BAE Systems (BA.), Meggitt (MGGT), Ultra Electronics (ULE)
Security
Private security firms and prison operators could be asked to assist with immigration policy changes.
BUY: G4S (GFS)
Healthcare
We imagine drug stocks will rally if Trump is elected – purely because Clinton’s price cap strategy is no longer a threat.
BUY: Shire (SHP), AstraZeneca (AZN), Worldwide Healthcare Trust (WWH), Biotech Growth Trust (BIOG).
WHAT HAPPENS IF CLINTON WINS?
Dance to beat of status quo
Jung at Mirabaud believes US stock markets won’t move too much up or down on a Clinton victory, saying her election would just result in the ‘status quo’. He suggests there could be a shift in sector trends but overall the market could stay ‘range-bound’.
Jake Robbins at Premier Asset Management says Clinton is regarded as ‘a safe pair of hands’. He adds: ‘She has different policies to Obama, but nothing revolutionary. I don’t think there’s anything that would impact markets in a significant manner over the long term.’
Whatever Clinton said in election campaigning should be taken ‘with a pinch a salt’, says Richard Champion, deputy chief investment officer at Canaccord Genuity Wealth Management. ‘You’re unlikely to get a clean sweep in the House of Representatives so her legislative programme will be constrained.’
Are there any obvious winners?
Consumer discretionary stocks such as those in the retail sector could benefit from a Clinton win, from a macro perspective.
She wants to push up the minimum wage. While that would increase retailers’ wage bills, it could also put more money into the large number of people who work for retail businesses. They would, theoretically, have more money to spend in the shops – thereby helping to drive the economy.
Companies engaged in energy efficiency could benefit under a Clinton presidency as she wants to drive more efficiency in the utilities sector.
What about the losers?
The healthcare sector stands to suffer the most if Clinton wins, at least as far as immediate reaction from global stock markets. The US spends just over 17% of its GDP on healthcare, so this is also a key issue for voters.
UK stocks most at risk of falling upon a Clinton win are Shire (SHP) and AstraZeneca (AZN) which have the biggest exposure to the US out of the FTSE’s blue chip drug companies.
‘Hillary Clinton historically hasn’t been a friend of the pharmaceuticals sector, stemming back to Hillary Care back in 1993,’ says Patrick Close, co-manager of the Neptune US Opportunities Fund C Acc (GB00B7K9LQ88).
‘Her comments on price controls last year has led to a lot of selling in pharma and associated sectors, and we anticipate more risk to the downside in the lead up to and after the election.’
The issue is relevant to Trump as well. Both candidates have expressed concern over the cost of healthcare with Clinton being the most aggressive, especially on the prices of pharmaceutical drugs, says David Osfield, co-manager of the EdenTree Amity International Fund B Inc (GB0008449075).
‘The impact to the wider sector is likely to be slightly negative as both candidates campaign aggressively at this late stage. In the medium to long-term, the sector remains in rude health, with the large cap companies showing strong cash flows, rising dividends and supported by robust balance sheets,’ says Osfield.
UK STOCKS TO BUY IF CLINTON IS ELECTED
Construction/engineering
‘Clinton would increase infrastructure spending by over quarter of a trillion dollars over a five year period,’ says Andrew Herberts, head of Private Investment Management, Thomas Miller Investment.
Subject to what infrastructure Clinton’s administration focused on, Herberts suggests Hill & Smith (HILS) as a potential beneficiary. ‘It has a presence in the US and has cited this factor in having potential both in its infrastructure, but also its galvanising business,’ he remarks.
BUY: Wolseley (WOS), National Grid (NG.), Hill & Smith (HILS), Ashtead (AHT), CRH (CRH).
Important information:
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
