Rudi’s View: Preparing For The Trump Years

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In this week’s Weekly Insights:

-Preparing For The Trump Years
-All-Weather Model Portfolio

By Rudi Filapek-Vandyck, Editor

Preparing For The Trump Years

Whether we love or loathe him, the return of Donald Trump to the White house on January 20th next year will mark one pivotal moment in modern day history, when existing trends and geopolitical currents shall be transformed into a new reality and future blue print.

As also indicated by management at Breville Group ((BRG)) last week, preparations have already started, even though uncertainty still rules about what exactly a second Trump term might look like. Won’t be the first time a politician might find execution and delivery on outlandish promises made a lot trickier once in office.

As investors, we have witnessed a number of similar pivots throughout the two decades past, from China’s emergence on the global stage, to the Global Financial Crisis in 2007/09 and the covid pandemic in early 2020. Each of these events changed the course of history and left an imprint on financial markets that still resonates today.

Consider the average price of crude oil throughout the 1990s had been no higher than US$15.67/bbl (WTI) while the average for gold bullion for that decade is only US$351/oz. I still remember representatives of BHP, Rio Tinto and Vale returning from annual negotiations with Chinese steel manufacturers, having agreed upon an iron ore contract price in the US$20s per tonne.

In the share market, there’s a noticeable distinction between the outperformers pre-GFC and the momentum switch that has favoured a different type of businesses since. This has simultaneously led to different investment styles and strategies performing best.

Can Trump 2.0 turn into a similar event that profoundly changes the course of history beyond 2024?

The potential is most definitely there. If prior precedents have taught investors one key lesson, it is that being flexible and not resistant to change(s) might be two invaluable virtues required for outsized returns.

Trump’s inauguration is still 70 days away and investors will be looking for signals from cabinet appointments and otherwise. Putting new policies in place still requires time, but maybe there is room for geopolitical shifts in the meantime?

The Enemy In Tehran

The world’s attention is understandably focused on Russia and neighbour the Ukraine, but I wouldn’t be surprised if we see much bigger development first through the mutual dislike between Trump and the political leaders of Iran.

The religious fundamentalists in Tehran reportedly tried to orchestrate an assassination attempt earlier this year, but the Trump administration has multiple motivations to isolate and quarantaine the Iranian leadership. Removing the country’s oil exports from global markets is undoubtedly one way to alleviate over-supply pressures that will only intensify if the USA produces more itself, as is the stated intention.

Outgoing US president Joe Biden has been criticised for being too soft on Israel’s retaliatory actions in Gaza and Lebanon, but how much of Biden’s firm opposition against Israel attacking Iran’s nuclear facilities still counts when a new president is about to take reign?

It’s pure speculation at this stage, of course, but here’s a window for Israel to hurt the enemy in Tehran in a profound manner when the president-elect can declare it happened on his predecessor’s watch.

Don’t sell your exposure to gold is an oft repeated mantra these past couple of days as higher bond yields have forced a retreat in bullion’s price. A spike in hostilities between Israel and Iran is but one motivation to have exposure.

America First

A potentially much larger impact might stem from Trump’s America First policy, which also includes import tariffs. Here the world’s response will be as important as the initial protectionism. China is in the line of fire, of course, but Trump has repeatedly stated he wants tariffs on all imports.

Assuming Congress goes ahead with these plans, it’s likely Europe, India and China will retaliate if and when targeted.

This is a Big Boys game. Smaller countries, of which Australia is one, do not have the same luxury to respond in a tit-for-tat manner. Smaller countries will simply have to suck it up.

Or they can lobby to be excluded, as Australia undoubtedly will try. Whoever is in power locally next year will draw optimism from the fact Australia was one of few countries exempted from steel import tariffs during Trump’s first term.

More good news is while the USA remains an all-important military and political ally, Australia’s exports into the USA only account for less than 4% of the country’s total, and most of that is agricultural, like beef.

Equally important is most of Australia’s successful growth stories have a significant presence in the USA, including James Hardie ((JHX)), Macquarie Group ((MQG)), Computershare ((CPU)), ResMed ((RMD)), and QBE Insurance ((QBE)). CSL ((CSL)) might be impacted from less demand for vaccines and a hard border with Mexico, as happened in the past.

China’s Response

Import tariffs are unlikely to become an important feature for Australia, but the indirect impact through slower growth in China and the rest of Asia, if not the world ex-USA, could be all-important. The most plausible offset here is much more aggressive stimulus from China.

Once again, the Chinese government’s fiscal announcement on Friday proved a disappointment for commodity traders and investors in the sector as measures to date remain underwhelming. While the Chinese government continues to placate markets with promises that more shall be done, it’s fairly obvious no Big Bazooka measures will be announced before more certainty arises about what exactly the new administration in the US is planning to do.

Investors in the sector might have to be patient for longer, but common sense suggests two things will happen when the US slaps import tariffs on Chinese imports:

1. Beijing will retaliate
2. Beijing will make sure its domestics economy will not slump into a black hole and will stimulate accordingly

US Growth & Inflation

At face value, an America First policy, also including less regulatory oversight and lower taxes, should be an added positive for corporate profits and US share prices. I wrote ‘added positive’ as it is not as if the current administration is passing on an economy in deep distress.

The broadly feared economic recession has been avoided, the labour market looks strong and healthy, inflation will soon start with a ‘1’ and the Federal Reserve is lowering the cash rate, and will continue to do so into next year. All three major indices just set a fresh all-time record high.

It doesn’t happen often for an incumbent government to be rejected as strongly as happened to the Democrats in this election when the economy is relatively healthy, but the answer may well reside with the surge in inflation immediately after the covid-lockdowns, as many American households never stopped feeling the pain.

The words from 1980s president Ronald Reagan come to mind: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”.

The Albanese government in Australia has received a lot of criticism for its support programs during the high inflation years (still ongoing) but it will be hoping it won’t receive the same punishment in next year’s election in exchange for it. No doubt, inflation will feature on the electorate’s mind, just like it haunts every other government around the world.

Trump’s election victory has injected that extra confidence the market needed to jump on board this year’s share market laggards, as also proven through a strong rally in the Russell2000 index. Smaller companies benefit more from an inward-looking US economy, as well as from the promised tax cuts.

For the rest of the world, the story looks a lot less straightforward. As shown in the graphic below, US corporates have excelled over the decade past in achieving much more aggressive growth for shareholders than their peers elsewhere around the globe.

This is yet again illustrated by the observation the average EPS growth forecast in Australia for the year ahead is currently less than 1% following two years of negative growth numbers for the ASX200.

A stronger US dollar and higher bond yields generally can potentially limit what central banks outside the US can do, including in Australia and throughout Asia, and this won’t be stimulatory at all for domestic corporate profits.

We don’t need FNArena’s Corporate Monitor to tell us the situation on the ground across the country is far from rosy: https://fnarena.com/index.php/reporting_season/

More corporate market updates are disappointing and analysts continue to lower expectations for the year ahead.

As also shown through the banks’ share prices this year, lack of earnings growth is not necessarily an impediment to further share price gains, but how much of the trends in the US can continue to be repeated in Australia when there’s also a persisting widening gap in earnings growth?

One trend that is not ready yet to disappear relates to Gen.Ai and the significant investments committed to by Big Tech. The quarterly results season in the US has provided plenty of supportive insights and updates. This is also why share prices in the likes of Goodman Group ((GMG)) and NextDC ((NXT)) are dominated by day-to-day volatility rather than by genuine ‘weakness’.

The Q3 results season has left market observers with a sense of slight disappointment nevertheless and this opens up a push-and-pull contest between Trump 2.0 enthusiasm and already elevated valuations.

Is this year’s Santa Rally by definition set in stone?

Good to keep in mind also, Congress and the new administration do not by default have carte blanche when it comes to policies next year and thereafter. A stronger USD can eventually become a problem as the top end of the market operates across the globe and additional, wider government deficits can lead to (much) higher bond yields.

Introducing import tariffs is also likely to reinvigorate inflation, as will a tight labour market if many thousands of illegal immigrants will effectively be deported with lower immigration numbers on top.

Most economists believe anything Congress and the new adnministration put in place in 2025 is most likely to impact from 2026 onwards. Hence why Oxford Economics is projecting two years of higher GDP growth in 2026 and 2027, followed by a sharply different picture as the negatives from tariffs and other policies start showing up.

Strategy: Three Phases

In terms of specific investment strategies, Hassan Tevfik, senior analyst at MST Marquee has identified three separate phases for the coming four years:

Phase 1 = relief

Phase 2 = nationalism

Phase 3 = stimulus

In Phase 1 we should see high beta stocks, cyclicals and small caps rally as investors are relieved the US election has generated a clear winner and there now is a visible path forward. Tevfik suggests this relief rally can potentially last until inauguration in January.

Destined for underperformance, he believes, are bonds, gold, large caps and defensives and bond proxies (infrastructure and REITs).

In Phase 2 we should see policy implementation that does not require Congress, which can include tariffs and immigration restrictions. A tightening labour market can impact on industries that are reliant on migrant employees, such as construction, agriculture, leisure and hospitality.

If inflation rises, this might impact on the Fed’s intention to lower the cash rate. Tevfik suggests inflation will start to pick up after six months. His advice is investors should avoid stocks sensitive to higher bond yields during this phase, such as James Hardie, while businesses like Ansell ((ANN)) and WiseTech Global ((WTC)) can be hit through trade tensions with China.

Businesses that potentially stand to benefit from US import tariffs are the insurers and insurance brokers, as well as BlueScope Steel ((BSL)), among others. Steadfast Group ((SDF)) is planning to increase its footprint in the USA.

Phase 3 should see GDP growth accelerating, possibly starting from late 2025 onwards, which should benefit your typical ‘Value’ segment and cyclicals in equities, but also CSL, ResMed, Fisher & Paykel Healthcare ((FPH)) and Cochlear ((COH)), suggests Tevfik, together with companies including Amcor ((AMC)), Ansell, Brambles ((BXB)) and Worley ((WOR)).

During this phase, your typical defensives and growth stocks might not be among beneficiaries.

As stated, dynamics and momentum for US equities might not by default translate uninterrupted into the local share market with differences in domestic dynamics and earnings growth possibly creating a difference.

All-Weather Model Portfolio

Contrary to last week’s update, the FNArena-Vested Equities All-Weather Model Portfolio did not underperform the broader market in October.

Total return of -0.81% was better than the ASX200’s retreat of -1.30% for the month.

Equally important: we are not much focused on such short-term outcomes, if at all. Over the past six months (up until October 31) the Portfolio has added 12.75% and that percentage rises to 33.13% over the year past.

Performance numbers are better than the market’s average over three and five years too.

Those are the numbers we focus on. All numbers quoted are pre fees, which are among the lowest in the market.

FY24 review for the All-Weather Model Portfolio:
https://www.fnarena.com/index.php/download-article/?n=DE2A4552-E2C7-4DC7-0A896CE5CF68ACD8

Prior years:

FY23: https://www.fnarena.com/index.php/download-article/?n=DFC11150-CB36-C777-1AA3EDA640E2F5BF

FY22: https://www.fnarena.com/index.php/download-article/?n=DFE7241B-9CD8-61F1-1602C581A8E539C4

FY21: https://www.fnarena.com/index.php/download-article/?n=DFF82691-E53E-3CF5-17A2337D72CDB54F

Video: Why FNArena & All-Weather Stocks

I’ve used my participation to the InvestmentMarkets’ conference in July to explain how/why FNArena started & what investors get out of it, including research in All-Weathers and Gen.Ai

The video: https://bit.ly/3A1pLuz

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 11th November, 2024. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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