Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 192

Post-Trump, have markets really changed much?

Following the election of Donald Trump, instead of the large correction that many experts predicted, developed equity markets and commodities have staged a strong rally. The market hopes the new President’s economic policies will be the panacea to the low-growth world we have been muddling through in the wake of the GFC. Most economists and forecasters are now confidently lifting their economic growth expectations.

Investors Mutual (IML) will readily admit that we cannot with any great accuracy forecast the performance of the economy over the next year or two. While many economists like to make confident predictions about the future, we would rather stick to our own investment philosophy of identifying undervalued quality companies that can grow their earnings and dividends in the years ahead.


Trump's pro-growth rhetoric and proposed stimulatory policies have led to predictions of higher inflation in the US, with the implication of further US interest rate increases through 2017. Federal Reserve officials have already readied the markets to expect three interest rate increases throughout 2017.

The truth is that Trump's reflation rally could run out of steam before it begins, with the impact that higher borrowing costs courtesy of higher bond yields could weigh on the US economic recovery. The US 10-year bond yield has already moved from its all-time low of 1.4% in July 2016 to around 2.5% as of December 2016, with significant impacts on the affordability of new houses for borrowers in the US.

The rise in US interest rates has also sent the US dollar to its strongest level in over 13 years against its major trading partners. The strength in the US dollar is another obstacle that Trump must overcome as he looks to rebalance the economy in favour of US manufacturing and US exports. The strong rhetoric from the White House towards supposed ‘currency manipulators’, namely China and Germany, is an attempt to talk down the US dollar.

Trump's much anticipated growth policies

Now in its eighth year of expansion since the GFC, the US economic recovery is mature and is already running at close to full capacity in certain areas. Removing regulatory burdens, as proposed by the new President, will be favourable for businesses, but extra spending on areas such as infrastructure could put further pressure on labour markets and the supply of materials.

Trump's team has not placed much emphasis on infrastructure spending since the election and little in substance has been provided to date. The new President must also get his policies through Congress. Although dominated by Republicans, many of these are unwilling to watch the US deficit balloon any further and they may well demand spending cuts to match any such spending initiatives. Trump’s answer to this is that stronger levels of economic growth will provide the plank to pay for the additional stimulus. This is political rhetoric at its best in our view.

Trump's proposed tax cuts for corporate America, while encouraging on the surface, also need to translate into higher investment spending by companies to boost economic growth. In the last few years, rather than build new plants, many US companies have used the low interest rate environment to focus on capital management via share buybacks, which have soared to record levels. Share buybacks may be good for companies’ earnings per share (EPS) and help increase the value of CEOs’ stock options, but they do not create many new jobs except possibly at investment banks and legal firms!

The low interest rate environment has not meaningfully boosted US investment. Instead, it has boosted leverage as companies have opted for financial engineering. Trump’s mooted corporate tax cuts have the potential to increase company earnings by up to 10-15%, but unless corporate behaviour changes, real economic growth will not jump as high as many are predicting.

Trump's intention of raising taxes on foreign-sourced production and effectively favouring domestic US production may lift US output, but it will do so via the substitution of overseas manufacturing. Consequently, global growth might be little changed as companies shift production in response to changing tax regimes rather than produce more overall.

Australia and China

The health of the Chinese economy remains crucial to the Australian economy. As witnessed at the beginning of 2016, commodity prices, including our most significant exports, coal and iron ore, sold off heavily on concerns of a hard landing in China. Chinese policy makers responded by loosening bank lending requirements and increasing infrastructure spending that helped double the price of iron ore and coal through the remainder of 2016.

The performance of Australia’s resource sector remains heavily dependent on the strength in demand from China. The price rally of 2016 helped propel Australia’s income and will provide some respite to the Federal Government’s growing Budget Deficit, which is coming under closer scrutiny by the ratings agencies.

Positioning in a low growth environment

At IML, we are conditioned to the mindset of investing without overreliance on strong world growth. Our style has always focussed on the quality and value of the underlying companies we own. With so many potential uncertainties still facing the global economy, we favour companies that can grow from their own initiatives rather than relying on higher GDP growth. These initiatives include market share gains, cost outs, restructuring, contracted growth and accretive bolt on acquisitions, where management has the capability to execute on their strategies effectively and where we are confident earnings can grow without relying on much help from the economy.


Anton Tagliaferro is Investment Director and Hugh Giddy is a Senior Portfolio Manager and Head of Investment Research at Investors Mutual Limited. This article contains general information only and does not consider an individual’s own circumstances.

Jerome Lander
March 04, 2017

Post trump, markets have indeed changed - we now may have entered a final concentrated blow-off top phase after a long bull market, where rhetoric and financial engineering can seemingly make everything ok and truly naive investing is well-rewarded, at least for a while! This is funny season at its best. How long will it last for is the question...

If the market does have a big sell-off, then long only active equity management might not provide much protection, although granted it can potentially do a lot better than a decimated index!

The more important point is portfolio construction and ensuring the overall portfolio is resilient and outcome orientated, and not simply market dependent - a portfolio like this is in the tiny minority right now. Being in that tiny minority is something truly worth considering!

Geoff Scott
March 02, 2017

Only recently commenced receiving Cuffelinks n/letter and finally decided to invest in Third Link. Have read many of the articles and extremely pleased with variety and content.

Graham Hand
March 03, 2017

Hi Geoff, appreciate the kind feedback. We will soon publish our annual Reader Survey which helps us determine the content to select, and hope you fill it in. Cheers

John O'Connell
March 02, 2017

"When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact" Warren Buffet

translated: the macro backdrop matters.

Yes, macro is not the be all and end all, but to trivialise it as virtually irrelevant is equally as derelict. Macro and micro both matter to selecting investments.

ps I am not trying to defend current valuations (they seem to be getting on the absurd side), and not trying to defend a President that is more a white shoe salesman trading on the cache of a well respected office - it may all end in tears.

But what I am saying is company specific fundamentals need to be calibrated against the backdrop of the industry and economic macro drivers.

In your example, it is easier to take market share gains when the industry/economy is growing sufficiently to expand the pie (more incremental revenue to win)


Leave a Comment:



Six months of Trump, thanks, but what about impeachment?


Most viewed in recent weeks

Who's next? Discounts on LICs force managers to pivot

The boards and managers of six high-profile LICs, frustrated by their shares trading at large discounts to asset value, have embarked on radical strategies to fix the problems. Will they work?

Four simple things to do right now

Markets have recovered in the last six months but most investors remain nervous about the economic outlook. Morningstar analysts provide four quick tips on how to navigate this uncertainty.

Three retirement checks for when you have enough

Not every retiree needs to gun for higher returns, but a conservative portfolio can court its own risks, especially with bond rates so low. But some retirees prefer to settle for a lower income.

How the age pension helps retirees cope with losses

It's often overlooked how wealthier couples can fall back on the age pension if a market loss hits their portfolio. The reassurance is never greater than in a financial (and now epidemic) crisis.

Have stock markets become a giant Ponzi scheme?

A global financial casino has been created where investors ignore realistic valuations in the low growth, high-risk environment. At some point, analysis of fundamental value will be rewarded.

Interview Series: Why it’s gold’s time to shine

With gold now on the radar of individual investors, SMSFs and institutions, here's what you need to know about the choices between gold bars, gold ETFs and even gold miners, with Jordan Eliseo. 

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 377

The most significant change in asset allocation by Australian investors in recent years has been the move into global equities. It's been a canny trade for those who focussed on the US, especially great companies such as Apple, Microsoft, Amazon and Google. International equities experienced net inflows into ETFs of $722 million in August 2020 versus only $181 million for Australian equities. 

  • 30 September 2020

The elusive 12%: is superannuation at a turning point?

Such is the concern among unions and Labor about Government plans to undermine superannuation that an 'Emergency Summit' was called this week, and pioneer Bill Kelty evoked a social commitment.


My lessons from five decades of investing

As she retires after 47 years of investing, Claudia Huntington explains the art rather than the science of the trade, the value of a great leader and culture, and the insights she gives to new colleagues.

SMSF strategies

The impact of our marriage breakdown on our SMSF

Even if a marriage ends amicably, there are complications when partners share an SMSF. You can't simply 'split' the assets on a handshake, and who takes the capital gains and what's the impact on an estate?

Investment strategies

The future is always clearest once it is in the past

It's one of those times when a case can be made that the market is expensive on some measures, but reasonable on others. Better to do what the great companies do: instead of guessing the future, they create it.

Investment strategies

Emerging markets: Should I stay or should I go?

For long-term investors, the most important factor driving returns is the price paid to acquire a stock. Emerging Markets stocks exhibit favourable valuations on both an absolute and relative basis.


20k now or 50k later? What’s driving decisions to withdraw super?

The amount of retirement savings withdrawn under the Superannuation Early Release Scheme has surprised many. This comprehensive survey of thousands of members of Cbus explains their motivations.


The surprising resilience of residential housing and retail

With a pandemic, a recession and high unemployment, there's every reason to expect residential property and retail sales to be collapsing. But data shows both are resilient, so what is happening?



© 2020 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.