It might seem like lunacy, and it actually might be – but there is little we can do about the result in the US, nor the sentiment the world is developing toward anti immigration and anti trade. What we can do is look past the financial market’s short term gyrations
The likely real winners and losers from the new Trump administration
Winners/ upside risk
| Sector | Implications of Trump administration |
| US Economy | Trump will spend – and spend big. He wants the headlines and results, and he has a friendly Congress and Senate. Spending on the domestic economy and encouraging corporates and households to spend via tax cuts is the policy rollout of least resistance. The risk to this is that he goes off script and scares businesses out of investing, but his need for personal accolades will likely keep him on script. There is an obvious question mark on the impact of his big spending, and therefore big borrowing, on future generations. Infrastructure spending will likely be positive for the economy; McKinseys, for example, have estimated that the benefit in terms of higher GDP will be around 1.3% giving it a payback period of around five to six years. Tax cuts on the other hand require companies and households to spend the cuts in the US, not save or it invest it offshore.
But that is not his concern at all. For the next few years, we can expect Trump to boost US GDP and US corporate earnings, with the sector exceptions noted below.
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| Heavy equipment manufacturers and suppliers | Trump is going to support both the US oil industry and invest heavily in infrastructure – which will increase demand for heavy machinery. Trump has earmarked US$137bn in tax concessions to fund US$1trn in business investment in equipment. Good news for Emeco, Ausdrill and Caterpillar Inc.. |
| Infrastructure outsource providers | GEO Group’s shares jumped 20% on the Trump win. GEO Group operates prisons in the US and had been threatened by Obama’s decision to end outsource contracts. This is just one example of the potential gains for outsource providers in various infrastructure sectors. Hospital providers in the US are the only sub sector at some risk, depending on their specific exposure to Obamacare beneficiaries.
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| Banks | While Trump will likely still make some changes to the conflict of interests within the finance sector, Trump is better for banks than Clinton, and markets had already priced in Clinton. He could possibly bring back the Glass-Steaggall Act, which hurt the commercial investment banking conglomerates.
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| US inflation | Trump’s big spending and anti trade policies both create the potential for higher US inflation. However it is largely unknown at this stage, and is dependent on international trade negotiations. It also assumes that the US dollar will fall, which is far from certain given the health of the US versus the rest of the world. In particular, severe anti trade moves by Trump would cause inflation in the US through imported household and clothing goods, but the global impact would be even more severe in those cases. This is positive for the USD and therefore dampening for US inflation.
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| Materials: Suppliers to the US | Trump’s infrastructure spending plans, for the little detail we have, are likely to add to US$1trn of projects start in his first term. Trump will buy US products and services ahead of global supplies, where the price differential doesn’t exceed the political benefit of buying American.
But it would be naïve to think that all materials suppliers across the world will benefit from a Trump Administration. Put in context, Trump’s planned spend is less than China spends yearly on infrastructure. It would only take a small slowdown in Chinese infrastructure spending to reverse any benefits to commodity demand created by Trump’s plan.
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| Australian suppliers to China, rather than iron ore | Any diminishing trade between China and the US represents an opportunity for Australia. Education, tourism and property are three examples of where China may choose to divert its spending or investments from the US to Australia. Australia, Canada, the UK and the US compete for these “lifestyle” sectors, where upper middle class Chinese families choose to invest in optionality outside of China for their families.
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Losers/ downside risk
| Sector | Implications of Trump administration |
| Oil | Expect volatility, and lots of it. OPEC meets later this month and has to decide what to do about an aggressive US administration. Supply could be increased to push the oil price down again, and trump Trump’s plans to encourage US investment. |
| Materials: Suppliers to China | Trump’s protectionist policies and his targeting of the Chinese steel industry create considerable downside risk for Australian iron ore exports. US steel’s share price jumped 20% last night, far more than the infrastructure spending beneficiaries that were all up around 7%. This is due to the expectations that Trump will move to cut Chinese steel imports via a tariff or similar barrier. Approximately 78% of our iron ore exports go to China and most of the balance to Japan and South Korea, with less than 1% going to the US. The US in fact is mostly self sufficient in iron ore, and still a net exporter.
Diversified iron ore producers will be far less impacted as the reduction in demand from China, South Korea and Japan will be offset by the rise in demand from the US. Even if the US supplies its own demand, its current export partners will need to source iron ore elsewhere, most likely from Brazil. BHP Billiton, Vale and Anglo will be far better positioned than FMG, should Trump get really aggressive on this issue. |
| US manufacturers that import, particularly from Mexico | Ford Motor Company has been singled out for its offshoring of components manufacturing to Mexico. Large tracts of US manufacturers use this practice, or they import parts from China. Input costs for these manufacturers will likely rise. |
| Global shipping sector | Trade by sea is already facing its worst conditions since the 1950s. Shipping companies, manufacturers from South Korea and Japan, and container makers and owners will suffer further. This would have a negative impact for Australian iron ore.
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Conclusion
Financial markets have very little idea how to assess the impact that Trump will have on the real economy. This has been obvious from the immediate crash on the news of his pending victory, and then the sudden optimism about the impact of his fiscal stimulus package, all before any real details have been issued. Taking one’s lead from financial markets when they themselves are so undecided is a risky strategy. Look past the noise and assess what it is that Trump is likely to actually do versus what he would like to do, but will be probably get constrained, and then of course what was just bluster. The above is merely one person’s thoughts based on what we know to date but an attempt to provide a slightly more reasoned view in the face of lots of excitable market commentary.