The markets do not like Trump as the President.
Dow tanked as much as 800 points at one point as market-watchers suddenly found out that the dream of a Hillary administration was going to be replaced by the nightmarish prospect of a House of Trump.
In the end, the U.S.A. has decided that the next President will be Donald Trump.
Are there any opportunities that investors can capitalise on? Are there any threats investors should be cautious about?
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
We take a look at some of the policies proposed by Trump during his campaign and examine what investments could benefit from his election, and what might be affected.
Bad for Global Economy
One of the main highlights of his campaign was his stance against free trade. He has proposed to withdraw from the Trans-Pacific Partnership and to renegotiate the terms of NAFTA.
Global free trade is a high level ideal that is attractive in principle yet extremely difficult to achieve practically. Countries trade goods and services depending on cost as well as quality. For e.g., it is more expensive to produce a car in the U.S. than in China.
The U.S. has a lot more advancement in technology than the rest of the countries. Hence, it is more efficient for the U.S. to focus on building and exporting technology, while China should manufacture and export cars. Under this arrangement, programmers and Silicon Valley executives prospered, while car mechanics and factory floor workers in the U.S. would lose their jobs. Trump adopted a protectionist stance and appealed greatly to the blue collar workers.
Trump specifically pointed out “Our exports to South Korea haven’t increased at all, but their imports to us have surged more than $15 billion – more than doubling our trade deficit with that country”, “Our annual trade deficit in goods with Mexico has risen from close to zero in 1993 to almost $60 billion”, and “America has lost nearly one-third of its manufacturing jobs since NAFTA and 50,000 factories since China joined the World Trade Organization”.
His upcoming proposals may focus on cutting off imports coming from the countries in his radar.
Trump’s campaign website mentions the following example: “The TPP lowers tariffs on foreign cars, while leaving in place the foreign practices that keep American cars from being sold overseas. The TPP even creates a backdoor for China to supply car parts for automobiles made in Mexico.”
We expect international trade to slow and the cost of production to increase if manufacturing really returns to the U.S. Profits of companies would drop, although they could be balanced with tax reliefs. The rest of the countries would benefit less too, all would experience higher cost of production.
The countries in the original TPP would feel the impact first, with effects ranging from lower economic growth, lower corporate profits, to weaker currencies:
- New Zealand
Good for Highly Profitable U.S. Companies
Trump has openly mentioned that he will lower the business tax rate from 35 percent to 15 percent. As mentioned in the previous section, this tax reduction might just negate the effect of increased cost of production when manufacturing is moved back to the U.S.
Nonetheless, the U.S. companies which have been paying the most tax dollars in recent years might benefit more than the others!
- Apple (NASDAQ:AAPL) – $13 billion in taxes
- ExxonMobil (NYSE:XOM) – $7.3 billion in taxes
- Berkshire Hathaway (NYSE:BRK.A) – $4.5 billion in taxes
Good for Defense Companies
“Increase the size of the U.S. Army to 540,000 active duty soldiers, which the Army Chief of Staff says he needs to execute current missions”
“Invest in a serious missile defense system to meet growing threats by modernizing our Navy’s cruisers and procuring additional, modern destroyers to counter the ballistic missile threat from Iran and North Korea.”
Trump stance on national defense is clearly stated on his campaign page. The military under him, he said, will “be so big, so strong, so powerful, nobody is going mess with us.” The defense budget was $598 billion USD in 2015 and ranked 1st in the world.
Clearly and surely, Trump favors a robust military and will increase on defense spending. He has made claims along the lines of increasing the size of the US Army to 540,000 active duty soldiers, rebuild the Navy to 350 ships, provide the Air Force with the 1,200 fighter aircraft and grow the Marine Corps to 36 battalions.
Plans to expand the military spells good news for defense companies and their shares should continue to benefit from Trump’s policy. The iShares U.S. Aerospace & Defense ETF (NASDAQ:ITA) should do give investors a good exposure to a myriad of defense companies.
The F-35 is a multi-role combat aircraft being developed by Lockheed Martin (NYSE:LMT), the world’s largest defense contractor. The aircraft is intended to replace a wide range of existing combat aircraft in the US, UK, Canada and other countries. The F-35 is a very important program and contributed around 22% of Lockheed Martin’s revenue in 2015. As the production of the aircraft continues to increase in the coming years, it will generate a signification amount of profits for Lockheed Martin (NYSE:LMT). About 78% of its revenue comes from the U.S. government.
Good for Gun Makers
“The right of self-defense doesn’t stop at the end of your driveway. That’s why I have a concealed carry permit and why tens of millions of Americans do too. That permit should be valid in all 50 states” ~ Trump, in response to the shootings in Oregon.
He believes more people should own guns for self-defense, and any tightening of restrictions on gun ownership would result in good people turning in the guns while the bad people continue to overpower the good.
This is good news for Smith & Wesson (NASDAQ:SWHC) and Sturm, Ruger & Co (NYSE:RGR), the major revolver manufacturers listed in the U.S.
Good for Construction and Engineering Companies
“I will build a great wall — and nobody builds walls better than me, believe me –and I’ll build them very inexpensively. I will build a great, great wall on our southern border, and I will make Mexico pay for that wall. Mark my words.” Source: Reuters
Donald Trump wants to build a wall between Mexico and the U.S. to stop illegal Mexican immigrants from trespassing onto the U.S. soil. On his first 10 Point Plan, he stated “Begin working on an impenetrable physical wall on the southern border, on day one. Mexico will pay for the wall.”
This will be a huge construction project and would take many years to complete. According to Bernstein’s research, the wall would cost somewhere in between $15 billion and $25 billion. Since it is not economically feasible to move heavy building materials across great distances, the greatest business beneficiaries would probably be firms that have production facilities closest to the border. It was mentioned in The Economist article that Cemex (NYSE:CX), a Mexican firm listed in New York, have about half its quarries close to the border.
Both candidate Clinton and President Trump has more or less agreed to better America’s infrastructure. Trump however has mentioned that he will spend half a trillion dollars on infrastructure, almost twice of what Clinton had proposed.
As recorded on his campaign website, His focus will be to “transform America’s crumbling infrastructure”, “create thousands of new jobs in construction, steel manufacturing and related sectors” to build “transportation, water, telecommunications and energy infrastructure need to enable development in the U.S.”
Construction and engineering companies such as Fluor Corporation (NYSE:FLR) and Halliburton (NYSE:HAL) are likely to benefit.
Good for Non-renewable Energy But Bad for Clean Energy
“Our energy companies are a disaster right now. Coal. The coal business is – you know, there is such a thing as clean coal. Our miners are out of work–now they’re just attacking energy companies like I’ve never seen them attack anything before.
They want everything to be wind and solar. Unfortunately, it’s not working on large-scale. It’s just not working. Solar is very, very expensive. Wind is very, very expensive, and it only works when it’s windy.”
Donald Trump’s energy stand is clear: “Unleash America’s $50 trillion in untapped shale, oil, and natural gas reserves, plus hundreds of years in clean coal reserves.”
Unlike Hillary Clinton’s stand to stay away from fossil fuels for renewable green energy, Donald Trump wants the U.S. fossil fuel industry to thrive. He believes it will “create millions of new jobs” in the energy sectors and “bring vast new wealth” to the country.
He has also promised to “open onshore and offshore leasing on federal lands, eliminate moratorium on coal leasing, and open shale energy deposits.” Hence, making it easy for the energy companies to tap their own fuel resources for growth.
Stocks that will benefit the most would likely be the big oils such as Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), and BP Plc (LON). Energy ETFs such the SPDR S&P Oil & Gas Equipment & Services ETF (XES) and the Vanguard Energy ETF (VDE) are also poised to do well.
Good for Health Insurers
Trump wants to “allow people to purchase insurance across state lines”, this could lead to an increase in the sales of insurance as sales reps of the few big companies are now able to reach more people.
This could be a good news to large health insurance companies that serve the U.S. market. Some examples include UnitedHealth Group (NYSE:UNH), Anthem (NYSE:ANTM) and Aetna Inc (NYSE:AET).
Given what has transpired on the campaign trail, Trump has every intention of making America “great again”. He will scale back on trade agreements and protect local industries at all cost. We feel that his stance is protectionism bordering on isolationism. In trying to make the American economy stronger, Trump’s actions will effectively weaken the global economy.
There are bright sparks for some companies though, as mentioned above. Our top pick would be Exxon Mobil (NYSE:XOM), on the grounds of Trump’s policy push on oil and tax reduction benefits.
With that said, whether Trump’s proposals would be put into motion remains an uncertainty, as he still requires support from a Republican Congress that has been rather unsupportive and divided on Trump within their party.
The commentary above is not meant to be financial advice, but it was an interesting thought exercise to consolidate Trump’s stance and relate to how politics could potentially impact certain investments.
Featured Image Source: Wikimedia Commons