What has happened?
Latte with Ray first heard of Donald Trump from Anthony Robbins’ “Unleash The Power Within”, that described how the real estate mogul went almost broke, owed several billions in debts from 1990 US recession and made a comeback in his own biography book “Art of the Comeback” in 1997 – well before his famous appearance on “The Apprentice” in 2004.
On 8th November, the underdog Donald Trump defeated Hilary Clinton in the US presidential election and will become the 45th President of United State of Amercia. He made his 2nd major comeback.
What are Trump’s policies?
Our Economist Michael Knox suggested Trump’s current policies show the significant influence of Speaker of the House, Paul Ryan. Paul Ryan is known as “a policy wonk”. In Australian English we might say he is a policy “nerd”. Ryan rose to prominence as Chairman of the Budget Committee of the House of Representatives. Economic management is his specialist area. The central part of Paul Ryan’s program is to reduce corporate taxation from 35% to 15% and eliminate most tax break. The purpose of this reduction is to make sure that US multinational companies bring their funds back to the US and reinvest it domestically in the US economy. He will also cut individual tax rates. Last but not least, he also proposed a number of tax reforms for manufacturers, increased military spending. If proceed, the total program would cost $4.55 “trillion” and push the US federal budget deficit to 4.5% of GDP. The US corporate tax rates proposed within the Trump program would also increase US private fixed capital investment in the Australian economy. This would also be enormously beneficial for the Australian economy.
Having said that, in near term, Latte with Ray can’t rule out that the US ecomomy will still go into a soft growth given Trump’s policy uncertainties and geo-political risks.
How does Trump impact our stock market?
Over the week, ASX 200 +3.7% 5,370 points, Dow Jones +5.4%, S&P500 +3.8%, NASDAQ +3.8%, Nikkei +2.8%, Hang Seng -0.5%, Shanghai +2.3%, FTSE +0.6%, TSE +0.3%, AUD/USD -1.7% $0.7546, Brent -2.2% $44.5, Iron Ore +15% $74, Gold -6% $1227, Coal +4.6% $111, US 10 year bond yield +21% at 2.2%, Australian 10 year bond yield +10% at 2.6%
As you would imagine how defensive the fund managers were positioning prior to the election day, the “unexpected” stock market “V-sharp” rally meant violent shorting covering and portfolio re-balancing. The only market that didn’t go up last week was Hang Seng, which was down -0.5% on concerns over US / China trade relationships in Trump era. RMB hit 6 year low.
Latte with Ray summarizes my thoughts here:
1. The stock market may not be completely out of the wood yet. The key risk will be the upcoming FOMC meeting in early December. Technically speaking, ASX 200 making new low (5,052 points) could mean we’ve not seen the bottom of recent correction yet. The ASX 200 will remain volatile and this is still a stock-picker market.
2. We need to watch the global bond market closely given bond selloff (i.e. bond prices going down, bond yields going up).
3. A rotation of fund flow from Bonds into Equities has commenced. Fund manager cash position likely to fall from highest level since 2001.
4. Federal Reserve will now hike rate in December. USD to strengthen.
5. US reporting seasons has been well received. (71% exceeded market expectation according to FactSet) .. favouring companies with offshore earnings.
6. Bond selloff triggering the selldown in Infrastructure / Yield Stocks. This may present us with buying opportunities.
Infrastructure Stocks (APA, AST, DUE, MQA, TCL, SYD all got smashed this week) …
Last month, we suggested
“In this low interest rate and low growth environment, we think infrastructure assets are “core portfolio holdings”. Having said that, while we like the infrastructure stocks as an asset class, we don’t agree on the current pricings. Even after recent price correction, the PE on infrastructure stocks remains elevated. Among the infrastructure stocks, Latte with Ray prefers TCL (already a Core Portfolio holdings), SYD (we see 2nd Sydney airport announcement as upcoming catalyst) … We would love to top up TCL below $10.00 and buy into SYD below $6.00.”
One month on, both TCL and SYD have NOW fallen within our accumulation zone, at $9.58 and $5.95 respectively.