Last week Donald Trump held his first formal news conference for 167 days. I was hopeful that in front of the press we would see a more Presidential performance from Trump, unfortunately, like many, I was disappointed
On Wednesday 11 January 2017 in Trump Tower Manhattan, President Elect Donald Trump held his first formal press conference since July 2016. While Trump didn’t disappoint in terms of entertainment – berating certain news organisations for publishing unverified reports about his alleged activities while at a Moscow hotel – he completely failed to deliver on content.
I was disappointed. I have two main concerns. Firstly, I and the rest and the financial markets became increasingly worried that Trump does not have a concrete action plan, or a rational method for putting one in place. On the election campaign trail, he made many promises and now is the time to implement and follow through on these. There was no mention of how the fiscal stimulus will work, or when and how corporate tax cuts will take effect.
For those investors desperately looking for actions, both the Senate and House of Representatives have started the process to repeal the Affordable Care Act (Obamacare) by 27 January. However, no replacement health insurance law has been written.
Secondly – and probably more concerning – is that Trump will be a highly volatile, loose cannon who is likely to shoot (or Tweet) first and ask questions later.
This will lead to considerable and unpredictable moves in financial markets. For example, Trump has already offered his opinions on the defence sector and Lockheed, and auto companies that planned to move manufacturing and production facilities offshore. At the press conference, Trump stated that pharmaceutical companies were "getting away with murder" with regards to what the US government is getting charged for drugs. Twenty minutes later, the nine biggest pharmaceutical companies (J&J, Pfizer, Merck, Amgen, AbbVie, Bristol-Myers Squibb, Gilead, Celgene, and Eli Lilly) by market capitalisation in the S&P500 lost about US$25bn or about 3%.
Implications for portfolio management
Given the above and the potential for significant further volatility, we recommend investors position their portfolios in a defensive manner. I think that holdings of defensive assets should be increased – either intra- or inter-asset classes – and portfolios should be reviewed so that investors are comfortable with the respective risk characteristics rather than the expected returns.
In the corporate bond sector, for those investors that continue to seek additional returns I recommend shorter dated, lower rated bonds over longer dated, higher rated ones. At this stage of the economic and credit cycle, I am more comfortable accepting credit risk over interest rate risk.
Given the current lack of supply of short dated, high yield bonds (see this week’s WIRE article on liquidity), as an alternative we recommend the following bank floating rate subordinated bonds:
|Issuer ||Call date ||Maturity date ||Bond type ||Capital structure ||Yield to maturity ||Running yield |
|ANZ ||25/06/2019 ||25/06/2024 ||Floating ||Tier 2 ||3.48% ||3.69% |
|Bendigo and Adelaide Bank ||09/12/2021 ||09/12/2026 ||Floating ||Tier 2 ||4.69% ||4.44% |
|ME Bank ||29/08/2019 ||29/08/2024 ||Floating ||Tier 2 ||4.26% ||4.41% |
Source: FIIG Securities
Prices are indicative and accurate as at 17 January 2017 but subject to change
Bonds listed are available to wholesale investors only