By Raymond Chan

What has happened?

Latte with Ray first heard of Donald Trump from Anthony Robbins’ “Unleash The Power Within”: how the real estate mogul almost went broke, owed several billions in debts from the 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 November 8, the underdog Donald Trump defeated Hillary Clinton in the US presidential election and will become the 45th President of United State of Amercia. His second 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 to eliminate most tax breaks. 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, and increased military spending. If they 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 period, given Trump’s policy uncertainties and geo-political risks. 

How does Trump impact our stock market?

Over the week, the ASX 200 gained +3.7% to 5,370 points, the Dow Jones rose +5.4%, the S&P500 rose +3.8% and the NASDAQ rose +3.8%.

  • Nikkei +2.8%
  • Hang Seng -0.5%
  • Shanghai +2.3%
  • FTSE +0.6%
  • TSE +0.3%
  • AUD/USD -1.7% to $0.7546
  • Brent -2.2% to $44.5
  • Iron Ore +15% to $74
  • Gold -6% to $1227
  • Coal +4.6% to $111
  • US 10-year bond yield +21% at 2.2%
  • Australian 10-year bond yield +10% at 2.6% 

You could imagine how defensive the fund managers were positioning prior to election day, and 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 the Trump era. RMB hit a 6-year low. 

The bottom line

The stock market may not be completely out of the woods yet. The key risk will be the upcoming FOMC meeting in early December. Technically speaking, the ASX 200 making a 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-pickers market.

We need to watch the global bond market closely given the bond selloff (i.e. bond prices going down, bond yields going up). 

A rotation of fund flows from bonds into equities has commenced. Fund manager cash position are likely to fall from their highest levels since 2001. 

The Federal Reserve will now hike rate in Decembers with the USD to strengthen. 

US reporting season has been well received, (71% exceeded market expectation according to FactSet) favouring companies with offshore earnings. 

The bond selloff triggered the selldown in infrastructure/yield Stocks. This may present us with buying opportunities.

Infrastructure Stocks - APA Group (APA), AusNet Sevices (AST), Duet Group (DUE), Macquarie Atlas Roads (MQA), Transurban Group (TCL), Sydney Airport (SYD) - all got smashed over the 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 the second Sydney airport announcement as an 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.

Disclaimer: Morgans Financial Limited (Morgans)

This report is provided for general information purposes only and is not intended as an offer to enter into any transaction.  This information contained in it is not necessarily complete and its accuracy cannot be guaranteed. We have prepared this presentation without consideration of the investment objectives, financial situation or particular needs of any individual investor.