Attractive corp tax regime, and dovish on energy, infrastructure, and bank regs
Companies: FOUR, AHT, BLTG, BMS, BUR, CHG, COB, HILS, HTG, KNIN, MCRO, NFC, PWTN, TLA, ULE, VCT, WEIR
Happy New Year all,
I had some interesting feedback from readers on the theme of my very first blog. In particular, there was interest in further exploring my high-level comments on Trumponomics and the potential rotation out of defensive ‘yieldy’ stocks. These will certainly be pertinent themes in 2017 and are worthy of further consideration. I'll cover my high-level thoughts on Trumponomics in this blog and next week I plan to dive a little deeper into dividends and dividend coverage.
Trumponomics will be a driver of market and stock behaviour in 2017. Therefore, while it is impossible to predict how, or even whether, Trump’s views may eventually end up as US policy, it is nevertheless worthwhile considering in broad terms how different sectors might be affected. I have also suggested a few companies that may be worthy of further investigation (although none of the below is investment advice!).
Below is a list of potential scenarios a Trump presidency could herald, the impact on various sectors and the stocks in my universe that are worth considering as a result:
- Corporate tax cuts, a repatriation tax and strengthening dollar - Lower corporation tax and an attractive 10% repatriation tax on the roughly $1trn of US corporates cash held in foreign jurisdictions is naturally a broad positive for US corporates. How would the repatriated cash be deployed?
- Implications for equities. The repatriation tax (if it takes place) will mostly benefit large US tech companies, but lower corporation tax would be good for lots of UK listed companies: Micro Focus, Blancco, 4imprint, Burford, Ashtead (90% US earnings), Victrex, TLA Worldwide, Next Fifteen. Especially TLA and 4imprint where virtually all profits are in the US (65% of earnings for TLA).
- Also asset managers with GBP cost bases and USD AUM should benefit.
- Strong dollar to increase input costs - The other side of the strong USD coin is that input costs will keep rising if USD strengthens, hurting retailers and any companies with a large percentage of costs in USD, eg oil and other commodities. This is especially true for commoditised industries or those with pricing pressure and why I like to own quality companies with a moat and differentiated products that have pricing power so they can pass the cost inflation through to customers.
- Less M&A from US into UK and Europe - There has been a big uptick in M&A of UK companies by US and European companies since the Brexit sterling slump and this will continue in my view. However, if Trump does offer the repatriation tax, that could be an attractive alternative for much of that capital. This could be more prevalent in the Tech sector as most of these enormous war chests held outside the US belong to Tech companies.
- Energy self-sufficiency - US oil and gas is perhaps the most obvious beneficiary of Trump's desire for energy self-sufficiency and a more lax approach to environmental considerations. Although, there are far more complex factors including the strength of the USD and OPEC’s and Russia's stance.
- Climate change scepticism - In utilities, Trump’s scepticism of climate change and green energy needs to be considered for those most committed to these initiatives.
- Implications for equities. The upshot in my view for this scenario is mainly losers in renewables and winners in oil and gas, as above.
- Infrastructure plans - A $1trn spending plan would naturally feed through positively to the US construction and building materials sectors. Non-US firms which operate or export into the US should also benefit.
- Implications for equities. A clear beneficiary of increased infrastructure spending in both the US (and the UK) would be Hill & Smith which generates nearly a 1/3rd of sales and just under half its profits in the US. It is achieving a 19% pre-tax ROI and a c.4% FCF yield.
- A further point to make regarding infrastructure is that metal commodity producers (of the non-precious variety) should be beneficiaries, although I'm not sure of the best way to play this.
- Softening Bank Regulation - Trump has suggested that he is not a fan of overburdening industries with regulation. In the banking sector, a rolling back of reforms such as Dodd-Frank and the Volcker Rule could reduce compliance costs and increase profitability (at the expense of a potentially higher risk premium demanded by investors). While positive and steeper yield curves create a more natural operating environment for banks and insurers.
- Implications for equities. The main entities to profit here are US banks, therefore I'm not sure there's a good way to play this with UK equities.
- NATO defence spending to increase - The Aerospace and Defence sectors could experience a positive tailwind as members of NATO increase their spending as a consequence of being less able to rely on the might of the US.
- Reworking of Obamacare - While Clinton had proposed a programme to control the pricing of pharmaceutical drugs, it seems Trump has no such plans, which should be a broad positive for pharma and some biotech. A re-working of Obamacare will have different impacts – potentially beneficial to some health insurance providers.
- Implications for equities. I include this as a high-level point, but it isn't my area, so I have no idea, unfortunately!
- Protectionism - Trump’s protectionist views may have adverse consequences for some. Reduced global trade flows could be negative for freight shipping (by sea and air). Autos could also be impacted.
- Longer-term - In the longer term, a major consideration will be the inflationary pressures and expected credit growth resulting from Trumponomics and how the Fed might react in response. Plus the impact of protectionist policies on global trade and US relationship with China.
To read a brief outline of how I think about stocks, and what I aim to achieve in this blog, please check out my first blog where I set out my stall.
Please Note: To be clear, I do not and will not ever give any advice. I will rarely mention individual stocks but when I do these will not be recommendations, instead just my thoughts at that point in time.