Trump’s Domestic Priorities: Good for Small-Caps and Industrials

By Michael Stanes, Investment Director at Heartwood Investment Management

The US election outcome raises many unanswered questions. The most obvious of these is what kind of Donald Trump do we get: the unpredictable, irascible, irresponsible and divisive Donald, or the more rational, conciliatory, business-orientated Donald who surrounds himself with wiser heads, and waters down his electioneering rhetoric in the cold light of an approaching Administration?

We of course hope for the latter, but cannot discount the former.

For now, what we can say is that we do not have a contested election result, which would have caused considerable uncertainty. That is a clear positive.

We can also assume that President-elect Trump will be business friendly. He will target tax reform, repatriation of overseas cash assets, infrastructure spending and less regulation for banks. The clean sweep of Republicans will surely aid his agenda, even it remains to be seen how the President-elect can work with Congress. This all does have the potential to improve US growth. And the market senses a potential inflationary impact.

Reflecting on events and given that many investors have been keeping liquidity to the side-lines, we are modestly adding to equity risk in our portfolios through our US equity allocation. We expect an incoming Trump administration to prioritise the domestic agenda, and that should be supportive to US smaller companies and certain sectors, including industrials. Therefore, we are taking exposures to both of these areas through passive instruments. Key risks to our view include inflammatory rhetoric out of Trump and higher bond yields having the capacity to upset equity markets. Overall, though, we believe longer-term structural economic developments in the US are compelling for value and cyclical areas of the domestic equity market.

Currency is always a consideration for overseas investors. While we have not been of the view that we are in the midst of a major US dollar bull market, the ability of the Fed to talk down the US dollar should they feel it is getting problematic is likely to be less going forward, given that their capacity to maintain an ultra-dovish stance will be much tougher under the new regime. We therefore expect the trend of US dollar strength to remain in place.

By Michael Stanes, Investment Director at Heartwood Investment Management

The US election outcome raises many unanswered questions. The most obvious of these is what kind of Donald Trump do we get: the unpredictable, irascible, irresponsible and divisive Donald, or the more rational, conciliatory, business-orientated Donald who surrounds himself with wiser heads, and waters down his electioneering rhetoric in the cold light of an approaching Administration?

We of course hope for the latter, but cannot discount the former.

For now, what we can say is that we do not have a contested election result, which would have caused considerable uncertainty. That is a clear positive.

We can also assume that President-elect Trump will be business friendly. He will target tax reform, repatriation of overseas cash assets, infrastructure spending and less regulation for banks. The clean sweep of Republicans will surely aid his agenda, even it remains to be seen how the President-elect can work with Congress. This all does have the potential to improve US growth. And the market senses a potential inflationary impact.

Reflecting on events and given that many investors have been keeping liquidity to the side-lines, we are modestly adding to equity risk in our portfolios through our US equity allocation. We expect an incoming Trump administration to prioritise the domestic agenda, and that should be supportive to US smaller companies and certain sectors, including industrials. Therefore, we are taking exposures to both of these areas through passive instruments. Key risks to our view include inflammatory rhetoric out of Trump and higher bond yields having the capacity to upset equity markets. Overall, though, we believe longer-term structural economic developments in the US are compelling for value and cyclical areas of the domestic equity market.

Currency is always a consideration for overseas investors. While we have not been of the view that we are in the midst of a major US dollar bull market, the ability of the Fed to talk down the US dollar should they feel it is getting problematic is likely to be less going forward, given that their capacity to maintain an ultra-dovish stance will be much tougher under the new regime. We therefore expect the trend of US dollar strength to remain in place.