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What Trump's protectionism means for Australian investors

Anthony Fensom  |  07 Feb 2017Text size  Decrease  Increase  |  

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While the impacts of "Trumponomics" will depend on actual policy implementation, the effects for Australian investors may be seen across stock, currency, and bond markets.

 

US President Donald Trump's pledge to "fight for free trade" has sparked concerns over a global retreat to protectionism. How can Australian investors manage the fallout?

The newly elected president has withdrawn the United States from the 12-nation Trans-Pacific Partnership (TPP) agreement, called for a renegotiation of the three-nation NAFTA agreement with Canada and Mexico, and put pressure on automakers and other companies to move manufacturing back to America.

Worryingly for Australian exporters, Trump has also threatened to impose tariffs of up to 45 per cent on Chinese imports, a move that could see Australia caught in the cross-fire between two major trading partners.

On the plus side, Trump's pledge to cut corporate taxes and boost infrastructure investment has helped spur a rally on Wall Street that has seen the Dow Jones Industrial Average top 20,000, while boosting the US dollar and increasing bond yields.

While the impacts of "Trumponomics" will depend on actual policy implementation and how Trump's policies are received by Congress, the effects for Australian investors may be seen across stock, currency and bond markets.

Higher inflation

"The delivery of Trump's campaign promises on economic growth and job creation, driven by meaningful fiscal expansion, is likely to increase inflation and interest rates," predicts Morningstar's head of equities research, Peter Warnes.

"A more hawkish Federal Open Market Committee, already indicating the possibility of three rate hikes in 2017, could be forced into a more aggressive stance should inflation spike beyond the comfort zone."

According to Warnes: "Rising bond yields are not the friend of equities markets. Nor is the unpredictability of a US president from a deal-making background, surrounded by yes people and used to getting his own way."

The yield on the benchmark 10-year US Treasury reached two-year highs above 2.6 per cent in December on expectations of rising US interest rates, up from 1.7 per cent before Trump's win.

Australian bond yields have also risen, and could move higher given their historically strong correlation with US Treasuries, according to Nikko Asset Management's James Alexander.

"If the Trump agenda of lower taxes, increased infrastructure spending and more protectionist trade policy prove to be inflationary as we expect, US interest rates and bond yields are likely to be headed higher. Australian bond yields will surely follow, as Commonwealth bond yields must remain globally competitive to ensure international investors continue to support our borrowing needs," Alexander warns.

This could affect Australian real estate buyers too, as the major banks pass on out-of-cycle rate increases to maintain their interest margins, according to Morningstar's Warnes.

Meanwhile, exchange-traded funds tracking gold have gained favour from investors seeking the precious metal's protection against higher inflation.

According to Bank of America's Chris Flanagan, a combination of rising yields and higher gold prices could signal increased market volatility.

Three consecutive quarters of rising benchmark bond yields and gold prices preceded previous market falls, including the 1973-74 bond market crash and 1987's Black Monday, he told Bloomberg News.

ASX stocks to watch

ASX-listed companies with substantial exposure to the United States, particularly those with manufacturing operations there, could benefit from lower corporate taxes and increased growth in the world's largest economy.

Those most exposed include pharmaceutical company Mayne Pharma (ASX: MYX), which earns 85 per cent of its revenue in the United States; building products maker James Hardie (ASX: JHX), which earns 80 per cent; gaming company Aristocrat Leisure (ASX: ALL), with two-thirds of its revenue from the United States; sleep apnoea company ResMed (ASX: RMD) at 55 per cent; and biotechs Cochlear (ASX: COH) and CSL (ASX: CSL), both at 40 per cent.

Others include real estate company Westfield Corporation (ASX: WFD) with 75 per cent of its earnings from the United States; share registry services company Computershare (ASX: CPU) with half its earnings; and chemicals company Nufarm (ASX: NUF) with 15 per cent of earnings from the United States.

Warnes suggests improved US retail sales could benefit Westfield, along with logistics company Brambles (ASX: BXB) and packaging companies such as Amcor (ASX: AMC) and Orora (ASX: ORA).

The losers could include resource and energy companies, should commodity prices slide on a US-China trade war, while adverse movements in the exchange rate could turn some of the perceived winners into losers.

Griffith University economist, Professor Fabrizio Carmignani, has warned that Australian exports could suffer if Trump's protectionist moves trigger a bout of competitive currency devaluations.

"If China were to devalue its currency other emerging countries could also be expected to do the same, with the risk that the global economy might be shaken by a domino of competitive devaluations," he said.

"Services, including education and tourism, would be among the sectors that would suffer the most."

Citigroup has warned that a US-led trade war "could easily trigger a global recession," while any disappointments over the fate of Trump's tax cuts and spending plans in Congress could spur market corrections.

For Australian investors, exchange-traded funds such as those offered by BetaShares, iShares and Vanguard could help ride the Trump wave in 2017.

Yet longer term, focusing on stocks offering Morningstar-rated economic moats may offer the best protection from renewed volatility in the Year of the Rooster.

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.

© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

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