Rudi’s View: Preparing For The Trump Years

Rudi's View | 10:00 AM

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.