Note: This article originally appeared in Billionaire Magazine on February, 11 2017.
Soothsayers and markets were astonished by Brexit and astounded by the victory of Donald Trump. Markets, particularly at the end of 2016, went from being sluggish to highly volatile. If you invest, or just keep a close eye on things, you no doubt spotted this.
This year is lining up to be an interesting one. The new Trump presidency, question marks about Brexit, the continuing threat from ISIS and populist movements taking shape in Europe all combine to pose a challenging environment for your portfolio.
There’s a lot going on, but to help give you focus when you’re planning your investment portfolio this year, here are some of the main areas to think about.
Capitalise on the Trump effect
“From this moment on, it’s going to be America First.” President Trump’s rallying cry during his inauguration speech was a clear indication that his primary focus will be on domestic growth and protection of US borders.
His appointment has now been well received by markets, although there’s a lot of speculation about whether the ‘Trump Bump’ will become the ‘Trump Slump’. For now, I’m remaining bullish on US equities — Trump’s economic agenda is primarily driven by putting the US first, which markets (particularly US markets) always like.
US companies are expected to make the most of his proposed tax cuts — more potential growth opportunities will certainly help some sectors, so try to spot the ones that take advantage of this. I like oil services, industrial equipment, raw materials, and defence contractors (which I’ll come onto again shortly); additionally, banks may benefit in the medium term from reduced regulation.
Bottom line: as long as the US economy continues to grow this can only mean opportunities within the US from an investment perspective. Spot these opportunities early in US equities to capitalise.
‘Make America strong again’
Not quite his campaign slogan, but it is certainly something that’s central to his policies. A key component of Trump’s agenda is defence, and the expectation is that he’s going to go big into this sector. More aircraft, ships, weapons, the works. But convincing the Republican Party on big spending on defence may be uphill work. Nevertheless, defence contractors such as Lockheed Martin, Boeing and Raytheon are still expected to win some hefty contracts as part of this ambition.
Bet on infrastructure
Highways and utility construction are also set to benefit from Trump’s proposed US$1 trillion project for improving US infrastructure. The long-term picture for these types of firms is good, although bear in mind that the market may have priced these in already so they may not be so attractive initially. Also keep an eye on related firms, such as engineering and materials.
Growth in energy services
Pledging a US$66 trillion shale oil and gas revolution, Trump has effectively overturned the moratorium on drilling and resurrected the use of low-emission coal. The new supply implied by these policies will serve to keep a lid on oil prices but the energy independence policy will, however, mean the stock of oil services companies, refiners and coal miners should be watched closely as these could present good opportunities.
Expect underperformance in Europe
Europe will continue to face challenges this year. With countries such as Spain, Greece and Italy overleveraged to the hilt and banks across the continent bearing the weight of bad loans, we can probably expect the European depression to continue in 2017. The European stagnation has also affected the global economy — China’s economic slow-down for instance — and as worldwide demand slows so do jobs for US workers.
We should continue to watch the situation in Europe closely, as it will take a while to fully digest Brexit. It’s also a big year for elections in Europe (France and Germany are the ones to watch), with nationalist movements making progress. Terror also continues to be a big dampener on markets, although given that they are now in the spotlight, Germany and France may have the most to lose at the moment.
The Dragon versus the Eagle
Trump has gone hard on his pre-election promises by pulling out of TPP, and this plays nicely into China’s role in global free trade. That said, it’s not going to be plain sailing and I’m keeping an eye on what Trump’s hawkish stance on China will look like. The adventurism in the South China Sea is obviously one area to look at when focusing on Sino-US relations, however, trade, foreign exchange policy, domestic growth targeting and ‘One China’ are all being scrutinised by markets.
Watch Asian economies closely
While the crowd is drawn to the China versus US stand-off, collateral markets, especially Taiwan, need to be monitored. Trump has also publicly questioned the longstanding US policy of providing outsourced defence for Japan and Korea, even going so far as to suggest those nations consider nuclear armament. Aside from the political implications, that could present an interesting opportunity for savvy investors.
There’s also talks of a closer relationship with the US and the Philippines and, with Rodrigo Duterte’s PHP3.35 trillion budget approved, domestic infrastructure spending looks set to increase while questions remain regarding the five new US military bases proposed last March.
Commodities: long gold, short oil
Generally, my view is long gold and strategic metals, and short oil (note that I am, however, bullish on oil services stocks). Central bank selling of US dollar fixed income has left a void that would most obviously be filled by gold; additionally, increased US industrial production will trigger industrial gold buying. Strategic metals will also see increased demand on the back of US defence and (some) infrastructure spending.
In terms of oil, it’s worth keeping an eye out as OPEC faces continued pressure from growing US supply.
Charlie O’Flaherty is partner and head of digital strategy and distribution at Crossbridge Capital. The views expressed in this article are those of the author and not the author’s company. This material is provided for educational purposes and should not be construed as investment advice or an offer or solicitation to buy or sell certain securities.