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The Trump Effect On Our Investments

It is inevitable that questions about the impact on the economy and our investments emerge as Americans and the rest of the world come to grips with the surprise result in the US Elections.

It is also tempting to get caught up in the debate about an unknown future scenario’s impact: such as the staff Trump will choose, his stance on global trade pacts and tariffs, the threat of US import duties on goods made in China, his denial of climate change, just to name a few.

As Howard Marks, the Chairman of Oaktree Capital states in his latest client memo:

Thus two key observations can be made based on the US elections developments:
1. First, no one really knows what events are going to transpire.
2. And second, no one knows what the market’s reaction to those events will be.
These observations reinforce my belief that it’s a mistake to base investment decisions on macro forecasts. But you knew that.

We agree with Howard.

However, we have considered the potential impact of Trump on the companies we invest in. Let’s explain by using the example of one of Trump’s policies that he promoted during his election campaign to illustrate the point.

Trump has committed to spending one trillion US Dollars over the next 5 years to rebuild infrastructure in the USA, while reducing taxes for corporates. The infrastructure spend could increase US debt significantly, lead to a weakening of the dollar, an increase in inflation and a possible increase in interest rates from the US FED. At the same time the US Economy may grow and jobs may be created. Another perspective is that a trillion dollars is not really so large; calculations indicate that China spends a trillion dollars on infrastructure every nine months!

The markets in the US have reacted by driving up shares in companies that at first glance have a good chance of benefiting from the trillion dollar infrastructure spend. Construction companies, infrastructure companies, banks and other similar brands are on the top picks list. The Dow Jones Industrial average hit an all-time high of 18,873.6 on the 10th of November after being down 5% at the time of the announcement.

Here are some of the possible outcomes as a result of Trump’s policies:

  1. The economy continues its gradual growth as Trump and his policies do not spur productivity growth enough to cause it to change significantly. OR
  2. The impact of the increased debt weakens the dollar. US exports become cheaper. US companies capitalise on their global footprint and grow. OR
  3. The investment in infrastructure strengthens the US economy and the dollar. There are more US citizens with the disposable income to spend on aspirational brands. OR
  4. The increase in spending leads to a rapid increase in inflation, interest rates spike, bond investments enter a bear market, and finally a bear market in shares ensues.

Our conclusion here is that the US elections and other current events around the world may cause short term volatility on the markets. Long term effects take time to be determined.

This short term uncertainty does not change our investment strategy.

We invest in companies that have very successful brands. The majority of companies we invest in pay dividends and we believe that the demand for high quality branded products and services that fulfill basic human needs will continue to grow.

We see any declines in share prices as an opportunity to buy more of the companies we already own.

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