Australian Investment Blog

Should we be scared of Donald Trump?

The US election is looming on Tuesday 8th November, personally I would rather vote on a Saturday like we do. Currently, the polls have Hillary Clinton marginally ahead, but we all saw with BREXIT that there can be a huge margin for error within polls, especially when the race for the Whitehouse is this close. Most market pundits are scared of a Trump victory, with some even predicting a market crash if he wins. We feel a short-term negative knee-jerk reaction is almost guaranteed, but our view at this stage is that Hillary Clinton will win. We place an obvious caveat on this opinion with plenty more chapters of this circus to play out.

CBA recently published some comprehensive research on the ramifications of a Trump victory, the main points were:

1. Trump looks positive for US economic growth and inflation would lift.
2. The global ramifications look negative, there are no winners from trade wars.
3. The net impact for the Australian economy is mildly negative, China is now more important to the health of our local economy.

The largest likely impact of a Trump victory would be the Fed accelerating the "normalising" of interest rates i.e. US interest rates lifting faster under a Trump administration, compared to a Clinton one.

This basically tells us that the theme which is currently unwinding aggressively will accelerate if Trump wins as the market focuses on higher rates. Last night US economic data continued to show a strengthening economy, resulting in a 1.5% rally in financial stocks, but falls of 1.9% in Real Estate, 1.8% in Telco's and 0.3% in Utilities. US banks rallied 2%, outstripping even energy stocks which were up 1.4%, following crude oil’s 2.1% gain.

US S&P500 Banking Sector Monthly Chart



Markets have spent a long time chasing the perceived safety "yield play" and selling banks. Our belief is this strategic change in market opinion which we have pushed for weeks, has only just commenced.
Since the first quarter of 2015, CBA has fallen 23% while Sydney Airport (SYD) has rallied 27%, even after the recent fall in SYD. If the two stocks just go back the differential at the start of this year, CBA looks set to outperform SYD by over 20%.

Commonwealth Bank (CBA) v Sydney Airport (SYD) Weekly Chart

Deutsche Bank put out an interesting chart this morning highlighting the weakness in banks over and above weakness in their earnings.Clearly banks have been out of favour however as we’ve been writing of late, if you think interest rates will start to increase globally, banks should be supported.

Let’s now take a look at the statistics for both this time of year and around a very close US election:

1. Over the last5-years CBA has rallied on average 6.6% in the month of October.
2. Over the last20-years the ASX200 has gained 0.8% in October, 0.4% in November and 1.8% in December with positive outcomes 70%, 60% and 75% of the times - a good outcome for November with 3 of our big 4 banks trading ex-dividend.
3. In a close US election, not surprisingly the market trades sideways into the vote, but then rallies strongly ~4% in November, whoever wins!

While we acknowledge that Donald Trump is definitely an extreme candidate, if he were to win the above statistics do bode well for equities into Christmas, and more so if we see a Clinton victory. We do not believe the market is currently positioned for a 4-5% rally into Christmas increasing the possibility of this outcome.

Summary

• We remain comfortably overweight banks within our portfolio, which is almost fully exposed to stocks.
• We have no interest buying stocks / sectors which will be negatively influenced by higher US interest rates.

Overnight Market Matters Wrap

• The Dow was higher last night, powered along by rising oil prices. The index closed up 110 points (+0.6%) to 18,281, whilst the S&P500 closed up 9 points (+0.4%) to 2,160.
• Oil rose to its highest levels since June after it was reported that there was another drawdown in inventories. There was a cut of 3 million barrels reported, which was the fifth weekly drop. Analysts had reported earlier that they expected a rise of 2.6m barrels.
• Gold remained steady after a dramatic fall in the previous session. The price fell US$1.10 (-0.01%) to US$1,265.20.
• Traders are now waiting for the non-farm payrolls due Friday night, our time. Expectations are for 171,000 jobs to be added, and for the rate of unemployment to remain at 4.9%
• Domestically, investors will look further into our economy, with the Trade Balance to be announced at 11.30AM. The consensus is a deficit of $2.3b.
• The ASX 200 is expected to open higher this morning, around the 5,479 level (up 27 points), as indicated by the December SPI Futures.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 6/10/2016. 9:00AM.

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