Last month many around the world were stunned as Donald Trump was elected president of the United States. Although this seemed an unlikely event to many and opinions vary on how it came to fruition, investors should now focus on the long-term opportunities of this new reality, while mitigating risks.
From a policy perspective, there are several sectors that may potentially experience a positive impact under the Trump administration.
Trump’s infrastructure spending plans gradually appear to be materializing. He wants substantial new infrastructure investments, per his “America’s Infrastructure First” policy. Perhaps the most notorious of those investments will be for construction of the border wall between the US and Mexico. Indeed, it was not surprising that the stocks of many construction companies potentially in the running to build such a wall hit multi-year highs soon after Trump’s election victory.
The banking sector is likely to be among the biggest beneficiaries of a Trump presidency. The day after being elected, the Financial Select Sector SPDR exchange-traded fund rallied by 8% to hit pre-2008 levels. One of the clearest reasons for the positive response is Trump’s promise to overhaul the Dodd-Frank Act, a detailed set of regulatory laws which Trump considers to be a major constraint on banks’ ability to lend money.
The Volcker Rule, which is part of Dodd-Frank, may be dismantled, which in turn would increase the power of banks to make speculative investments. It is believed Trump might also increase the threshold at which certain “systemically important” financial institutions are subject to greater regulatory oversight from the Federal Reserve.
Aerospace and Defence
With Trump’s Republican Party also taking control of both houses of US Congress, defence stocks are likely to prosper, with some analysts suggesting that more military spending will be pushed through Congress. The party is likely to undo a sequester, which will free up billions of dollars to be used in beefing up the military.
Todd Harrison of the Center for Strategic and International Studies estimates that Trump’s proposals to beef up the military could add more than $900 billion to the Pentagon’s budget over the next decade.
Much uncertainty surrounds Trump’s healthcare plans, and as such, the industry is likely to suffer from lower funding, as potential investors wait until more solid measures are implemented.
Trump initially promised to “repeal and replace” the Affordable Care Act (commonly known as “Obamacare”) but has since moderated his position, stating that some parts of the health program will be preserved. Most, however, still believe that Obamacare will be terminated and will be replaced with a plan that will benefit healthcare companies – but this may take several years.
Indeed, Trump has picked a well-known critic of Obamacare – Georgia Representative Tom Price – as Secretary of Health and Human Services. If Obamacare is significantly overhauled or replaced, therefore, approximately 20 million people are likely to be without health insurance. As such, the stocks of health insurers are likely to remain under pressure during this period of uncertainty.
That being said, drug stocks are likely to benefit, as Trump’s position on regulating prices seems more lax than Clinton’s was. Biotech stocks will similarly benefit from the less stringent regulatory environment.
Trump has adopted an “America First” energy policy, which means he wants energy independence for the US by providing support for domestic energy production. The oil, gas and coal industries, therefore, are all likely to benefit. He has previously said he will remove all “unnecessary” energy regulations, such as opening up federal lands and offshore areas for oil and gas exploration and production, and will remove environmental rules currently inhibiting coal production.
However, Trump’s belief that climate change is a “hoax” does not bode well for the clean energy industry. He has talked about withdrawing the US from the Paris Climate Agreement, a landmark deal struck between 197 countries in December 2015 to prevent global warming and curb harmful carbon emissions. He has shown little support for renewable energy, and some expect him to roll back federal tax credits for solar power.
Trump has also recently confirmed the chief executive of Exxon Mobil, Rex Tillerson, as his choice for US Secretary of State. Tillerson has previously highlighted the “catastrophic” effect of unmitigated climate change, although under his tenure, Exxon – the world’s largest publicly traded international oil and gas company – has also been accused of deliberately misleading the public over the impact of fossil fuels on global warming. Clearly, America’s oil industry is likely to be a major beneficiary from Tillerson’s appointment. In 2011, Tillerson signed an agreement with Russia to drill in the Arctic. Although Western sanctions on Russia since then have curtailed the deal, Tillerson is now uniquely positioned to lift such sanctions as Secretary of State. Given his close ties to Russia – which have raised some eyebrows – such a move may well be on the horizon. Trump’s choice of Rick Perry, the former Governer of Texas, to lead the Department of Energy, is another signal of his pro-conventional energy mandate. The move could prove beneficial to the U.S. natural gas industry.
Trump has also promised to rip up multilateral trade deals such as the Trans-Pacific Partnership, involving 12 Pacific Rim countries, and the North American Free Trade Agreement in place with Canada and Mexico. Along with Trump’s “America First” approach, therefore, overall volumes of US trade are likely to decline.
Given the uncertainty over Trump’s ultimate plans at this stage, a ”bottom up” stock-picking approach might be the best way to navigate the markets under his presidency. This approach would be based on the specific merits of each investment opportunity, with an awareness of how policy might help shape the broader economy.