If you haven't noticed, Trump is addressing each of his campaign promises, which is both refreshing and novel to see for any politician, let alone Trump. He began with addressing the Affordable Care Act on Day 1 to Dodd Frank, stifling regulations and Iran this past Friday. In between he has dealt with immigration and the Supreme Court nominee amongst many others. I have lost count of the number of executive orders that he has signed in his first two weeks in office. Simply amazing!
Next up are tax reform, trade and a major infrastructure program.
Trump has elevated the visibility and influence of the Presidency and has gained the attention of governments, corporations and, most of all, the citizens of the world. He certainly is polarizing as can be witnessed every day by the media and in responses to my weekly blog from complete strangers and calls/emails/texts from my friends here and abroad. The opinions range from Trump potentially being a huge success to him being impeached within two years. And you ask why we are having more volatility in the financial markets?
The only way to successfully invest is listen through all of the daily noise, find that underlying trend(s) and invest accordingly. We are right now in the sweet spot: the global economies are improving albeit slowly; business and consumer sentiment are rising rapidly; monetary authorities are staying one step behind therefore monetary policy will remain accommodative for the foreseeable future; earnings growth, along with order patterns, has begun to accelerate and America is back in business even if you don't approve of Trump's tactics and policies.
Trump and his team have some definite views. If you don't listen, you will not make money and, in fact, you will get hurt.
What is clear?
1. Domestic and foreign corporations should build capacity in the United States not only to supply domestic demand but also to export abroad. He will change tax and regulatory policies to make this happen.
2. Individual and corporate tax rates will go down stimulating growth here and also abroad. Repatriation of foreign cash will be part of the deal with some of the cash earmarked for capital spending and research.
3. Onerous parts of Dodd-Frank and other regulations will be eased to promote growth. The Affordable Care Act will be reconfigured to increase the competition to lower the rates and also to improve the quality of healthcare. All parts of the healthcare industry will be part of the solution rather than working against each other.
4. Both the carrot and stick will be used to induce corporations to build here, hire additional employees and hold down prices. For example, he promised the health care industry that he will cut the time it takes to bring new products to market therefore significantly increasing the ROI for research spending plus lower corporate taxes in return for holding back/cutting prices and building facilities here. It was a net positive for the drug industry when initially perceived as a negative.
5. Fair trade will be the order of the day when negotiating bilateral trade deals. Government subsides including low or no cost loans will be part of the equation in trade talks. Trump's team understands the importance of globalization so don't expect them to do the unthinkable and enter trade wars where no one wins. His teams will analyze/evaluate the reasons why some countries have huge trade surpluses with the world including us. I have commented many times that Germany wants to keep a Eurozone not so much for less barriers amongst nations within Europe but because they are huge winners globally from a weak Euro. And China does clearly manipulate its currency. Japan and Mexico do not.
6. A major infrastructure program will be initiated quickly without the regulatory delays that held back perceived "shovel ready projects" in the past. Who can argue against the needs and multiple benefits of such a program? And it will be U.S workers getting employed with U.S. supplied materials.
7. Our police and national defense will be strengthened and our borders made more secure. Investing in the U.S will be the place to locate that next plant.
8. The U.S will be respected, if not feared, by many governments, which will lead to positive change in our foreign relations and trade. The U.S will no longer be seen as a pushover. While the uncertainty is troubling, governments are figuring out how to work with a stronger U.S rather than abandoning relations with us.
So where does this lead us?
The clear investment winners are the Trump/reflation beneficiaries including industrials, capital goods, infrastructure-related companies, commodity companies including energy, steel, chemical and aluminum, financials and technology while reducing your exposure to consumer non-durables, utilities, retail and old pharma. Stay short the bond market as the yield curve steepens and stay long the dollar although Trump and his team try to talk it down to boost domestic economic growth near term until their policies take hold.
Trump's victory, contrary to what you hear in the media every day, has infused optimism into the global economic outlook. Despite all the naysayers Trump is doing just what he promised to do when campaigning, which ironically has confused many people, including governments, thinking that he would not follow through on what he had said. While you can't take his words literally you can take to the bank the gist of what he say. Foreign governments are not used to the truth but appear to be taking heed.
The bottom line is that the global economies, led by the U.S, will accelerate as we move through the year into 2018. The global stock markets will benefit from surprisingly strong earnings growth led by the reflation beneficiaries. Continue to rotate out of old winners that sustained earnings and dividend growth during the anemic years following 2008 and buy the companies that have cut costs, reduced capacity and lowered their breakeven points trying to stay alive in the former non growth, deflationary world. These companies will even surprise themselves as to the positive earnings leverage that they have as volume rises and prices improve.
It's refreshing to have a President do what he promised to do when campaigning. Just follow his campaign promises as a path to Paix et Prospérité.
So, review the facts; pause, reflect, consider mindset shifts, review your asset allocation and risk controls; do in-depth independent research.
William A. Ehrman is managing partner at Paix et Prosperite LLC. He served as head of the Investment committee at Century Capital Associates, followed by head of investments for Worldwide Equities and Private Equities at the Quantum Fund. He was George Soros’ first partner.