Financial Decisions | Views

Trumponomics!

Love him or loathe him, President Trump sure hasn’t wasted any time in signing off on executive orders to action many of his election promises. If the first two weeks of his presidency is anything to go by, the biggest winner to come out of his presidency seems to be the media with a flurry of political news each day to don their front page. There’s been no shortage of controversy and political news from the White House since his inauguration.

This newsletter however, is not meant to provide you with our view of his presidency, given he is only two weeks into his job. What we want to convey is that we need to be prepared for whatever is about to come, good or bad. One thing we know for sure is that subtlety has never really been his style, nor his strong point. So, let’s see what sort of facts we are already seeing come to life.

Some of the plans to be actioned –

  1. Cut taxes for big businesses and high income earners – and hope that the tax savings will create jobs and more economic activities.
  2. Repatriate overseas cash from global companies with some sort of one-off amnesty plan.
  3. Protectionist plans – adding tariffs, building a wall and verbally softening the US dollar to “bring manufacturing back home”.
  4. Partially roll back some of the regulations from the Dodd-Frank Financial Act.
  5. As a border protection initiative, Trump is actioning an immigration ban on seven mostly Muslim-dominant countries, a highly controversial policy that has seen a lot of backlash from both Americans and global leaders and citizens alike.

What are professionals and the public saying?

Within his grand plan to re-invigorate American manufacturing jobs, there’s no sign, let alone guarantee, that the very people that put their faith in him, the American middle-class, would benefit in any major way. Analysts have also commented that many of his plans are likely to increase the budget deficit even more and benefit the high income earners with greater tax refunds. There seems to also be a resounding view that the reality of it all is that globalisation is here to stay while a full-on renaissance in American manufacturing is very difficult to pull off as it helps some but could hurt others. To put it simply, it would just shift employment around.

One of the most important concerns to come out of his words and action thus far, is his willingness to reverse America’s 80 year commitment to expanding world trade. Yet, with his measure to slap a 20% tariff on imports from Mexico, this commitment to world trade could already be in jeopardy. While time is required to see if his plans will actually be beneficial overall, Trump could ultimately alienate America if he pushes too far on some of his views. His views on immigration for example, have certainly raised a lot more questions on his leadership and diplomacy and angered a lot of people around the world. Some business leaders have expressed concerns that his populist policies may actually overwhelm the pro-business agenda. While it may seem like a border protection mechanism to keep America safer, the actual consequence could in fact be more detrimental than it first seems. This policy, if put in place, may provoke an even greater reason for anti-American propaganda amongst all Muslim states around the world and provide more impetus for terror-related activities, an outcome with possible devastating consequences to America and its allies.

Above all, let’s not forget that China is just around the corner, waiting for America to implode. How Trump will end up dealing with the whole China trade issue will be one to keep a close eye on when the time comes. That could be one of the biggest keys to keeping markets stable or provide reasons for it to sell-off and begin a string of volatile periods during his presidency.

What is our stance?

The biggest lesson for investors during times of highly controversial and polarising views, is that market participants end up acting out of emotions based on what has been heard and read from the media. While fiscal and regulatory policies can no doubt play a part in a company’s revenue and profit levels, we have seen countless periods of macro-economic activities driving market prices over the shorter term. There’s reason to be cautious in the shorter term when markets have been somewhat elevated recently but volatile times are also times of opportunity.

Over the long run, we advise on differentiating the two things related to equity returns and outcomes – Prices and Earnings. Stock prices are driven on a daily basis by market sentiment. It does not tell us anything about the valuation, prospects or the quality of a company’s business. Over time however, their earnings quality and sustainability during different market cycles are what drives stock returns. There has never been a more important time than now to adhere to the principles and philosophy that has driven our portfolio construction methodology – quality stocks and quality managers, when combined with purchase at reasonable valuation, should provide investors with a reasonable outcome over the long term. Not everything in investment will work out but sticking to these principles will provide the highest chance of protecting your capital from permanent losses and provide reasonable growth over time.

In these sorts of times, remember to adhere to the words of Benjamin Graham: “In the short run, the market is a voting machine. In the long run, it is a weighing machine.” That is, political and economic news in the short term can swing markets and your portfolio values up and down, but over time, solid companies that can deliver earnings growth will see their share price appreciate and if your portfolio is full of these companies, it is likely to do just fine.

So welcome to the markets in 2017!



Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. December 2016

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