Yikes! They only went and elected Trump! There was a brief panic as the result of the US presidential election became apparent, then miraculously financial markets seemed to stop worrying about the end of the world that was supposed to come next and instead focused on what to do and what to buy. That’s what we’ll do this week.
There is a sizeable camp of investors, centred on the indomitable Warren Buffett, who reckon that politics rarely gets in the way of long-term equity-market growth. That might be true, but if you are thinking slightly more short term, I’d be a little more cautious, especially if you are heavily invested in bonds. The big message from this election is that people want more than zero interest rates, squabbling over “austerity” and the promise of free trade. Expect some big surprises during a Trump presidency.
Still, I think US equities might be due a decent bounce, though the recent leaders in the tech sector might not be at the front of the pack this time around. US equities still look hideously expensive in my view, but we need to bear in mind the positive momentum and ample market liquidity. And if US government bonds drift down in price, money might flow out of bonds into equities, pushing stock valuations even higher.
In terms of sectors, I think healthcare could be one of the biggest winners from this whole drama. If Obamacare is largely scrapped, healthcare spending could increase. We’ve already seen a big bounce for US healthcare and biotech stocks and I think this could continue. The impending IPO of the BB Healthcare Trust next month is perfectly timed. In the meantime, you could put money to work in the Polar Capital Healthcare fund (LSE: PCGH), Worldwide Healthcare (LSE: WWH) or the Biotech Growth Trust (LSE: BIOG) (the last of which I own shares in).
I also think the US financials sector could be worth a closer look: most of the banks should perform strongly. Trump may have inveighed against Wall Street, but paradoxically (or not), his Republican friends are very eager to deregulate Wall Street and boost consumer demand. This is all excellent news for US banks, big and small, although I would say that the domestically focused regional banks should benefit disproportionately. I own the iShares US Regional Banks ETF (NYSE: IAT), which has done very well in recent weeks.
Another sector that should benefit from a Trump win is energy. Trump is great news for natural gas, especially unconventional shale, according to Goldman Sachs, as his pro-coal approach should remove policy uncertainty and incentivise greater investment in the gas sector, with prices competitive when compared with coal and petrochemicals. Energy funds with a strong exposure to US unconventional oil and gas might be worth a bet. Names like the private-equity focused Riverstone (LSE: RSE) and the soon-to-launch Westbeck Energy Opportunity Fund spring to mind.
What about Trump’s promised infrastructure boom? I’m a tad suspicious about the timescales here, as well as your ability to make any money out of it. The biggest specialist infrastructure funds on the London market, such as INPP and 3i Infrastructure, all have assets in the US, but I can’t see much happening in the short term.
The US construction sector might be worth a closer look, but you’d have to look at stock-specific ideas. For me, the better bet is US housebuilders, where I can see immediate upside – British investors can buy the US-listed iShares US Home Construction ETF (NYSE: ITB).
In the news this week
• Investors who “rely on fund managers to look after their savings at reasonable cost” will be shocked to discover that they are making profit margins of almost 40%, according to a “damning study” by the Financial Conduct Authority (FCA), says Nina Montagu-Smith in The Times. The FCA launched an investigation into the £7trn asset management industry, £3trn of which is held in pension funds, amid concerns over high charges and lack of transparency – and identified a “swathe of problems” as a result, says Laura Suter in The Daily Telegraph.
Active fund managers are charging too much and failing to outperform lower-cost passive funds. Fee structures are unnecessarily complex and opaque. And asset managers concentrate on attracting new money rather than investment returns because fees are “charged as a percentage of the assets invested”. The FCA’s proposed solutions include the introduction of a single all-in-one fee and aiming for greater clarity about investments to enable investors to judge outcomes more accurately.
• Online stockbroker Hargreaves Lansdown will launch a low-cost UK shares fund, in its first venture into equity management, says Michelle McGagh for Citywire Money. The HL Select UK Shares fund will invest in roughly 30 stocks, and will charge a fee of 0.6%, on top of its platform fee of up to 0.45%. Unlike most funds, HL’s new offering will disclose all shareholdings, instead of just the top ten, and will explain exactly why it holds each stock.
Activist watch
Shares in Twitter rose more than 3% last Monday after hedge fund Jana Partners revealed that it now owns 2.9 million shares in the company. Although this amounts to a fairly small position, it is likely that Jana will “push for either reforms or a sale at the influential, but underperforming, social media company”, says David Morris on Fortune.com. Twitter has been frequently discussed as a likely acquisition target in recent months, with Apple, Disney and Google all mentioned as potential buyers, but none of that interest came to fruition. Jana has a history of restructuring large companies, although Twitter’s problems “arguably have more to do with business and product strategy than structure”, says Morris.