These ASX stocks will be winners from Trump's election victory
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There are many ASX-listed companies poised to benefit from a Trump administration, despite the expectation of increased volatility.
Sell bonds and buy US stocks.
That appears to be the basic message from the market's response to President-elect Trump.
"My guess is Donald Trump could well be positive for US markets in the medium term, but in the near term markets will be volatile and risk-taking should take a back seat. Emotional investing is rarely successful," said Morningstar's head of equities research, Peter Warnes.
After the initial shock wore off, financial markets quickly rebounded to focus on some of the more positive aspects of the billionaire businessman's platform.
However, there are negatives for investors too, depending on whether Trump's campaign rhetoric is matched by his actions.
Bonds have already been hit hard with the prospect of higher US inflation, due to Trump's policies of boosting government spending on defense and infrastructure while handing out large corporate and personal income tax cuts.
Bond investor PIMCO believes the result will be a faster pace of interest rate hikes by the US Federal Reserve, with potentially three hikes by the end of 2017.
Australian bond prices have already responded, with the yield on the benchmark 10-year Australian government bond surging 27 basis points to around 2.5 per cent on Thursday. This compares to its rate in early September of just 1.8 per cent.
So-called "bond proxies" such as Sydney Airport (ASX: SYD) and Transurban (ASX: TCL) have been punished following the spike in yields, dropping around 5 and 6 per cent, respectively, in the week following the election result.
The good news, particularly for retirees, is that fixed-income assets should start delivering higher returns.
Any surge in inflation in Australia could also see the Reserve Bank of Australia start moving rates higher too, leading to increased bank deposit rates for savers, although punishing borrowers and threatening to hit property prices.
Buy US stocks
Trump's estimated US$4.5-trillion ($6-trillion) spending hike will drive US GDP higher, while his move to slash corporate tax will lift US company profits and encourage repatriation of capital.
This along with higher inflation should see the US dollar appreciate, with the Australian dollar likely to fall as a result.
Australian investors could therefore benefit by buying US stocks, with the added benefit of increased nominal gains due to the rising US dollar.
Sectors expected to benefit from the Trump administration include coal, with Vice President-elect Mike Pence having declared "an end to the war on coal".
US coal stocks have already moved higher, while the oil and gas sector should also benefit from a more investment-friendly regulatory regime, including stocks such as Chevron and Exxon Mobil.
Other winners include defense stocks such as Lockheed Martin, with Trump having pledged to make the world's biggest military "much stronger than it is right now".
Transport and infrastructure-related companies such as Caterpillar are also set for gains, while pharmaceutical and biotechnology companies have moved higher with the removal of the threat of extra regulation from defeated candidate Hilary Clinton.
US banks and insurers should also benefit from easier regulations, stronger economic growth and higher interest rates, since the expected steepening of the yield curve will lift profits.
Losers from a Trump administration include alternative energy companies such as solar and wind, electric carmaker Tesla, and potentially technology stocks such as Amazon, Apple and Microsoft, given Trump's critical comments of Silicon Valley.
For ASX investors, beneficiaries could include the big miners, BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO), along with coal miners such as Whitehaven Coal (ASX: WHC) and oil and gas company Woodside Petroleum (ASX: WPL).
Other Australian companies with substantial US earnings include property company Westfield Corporation (ASX: WFD) (75 per cent of overall earnings); biotech CSL (ASX: CSL) and wine maker Treasury Wine Estates (ASX: TWE), both 40 per cent; Macquarie Bank (ASX: MQG) (around 30 per cent); and building products maker Boral (ASX: BLD) (25 per cent).
However, the end of the 35-year bond bull market could hit utilities, real estate and infrastructure stocks, which have all benefitted from low interest rates.
Another negative is Trump's threat to impose tariffs of up to 45 per cent on Chinese exports, which could weaken economic growth in Australia's biggest trading partner and threaten the resource sector's recent rebound on the back of higher coal and iron ore prices.
Analysts expect increased volatility following the Trump "political revolution," given the influence of the world's biggest economy and military superpower.
"Although many of his policies are pro-business, especially regarding taxes and less regulation, risk markets will not likely respond well to his election for a while, especially given a less pro-trade environment, civil unrest, and likely major confrontations with Iran, North Korea and China," said John Vail, chief global strategist at Nikko Asset Management.
Fidelity International's global chief investment officer, equities, Dominic Rossi said known financial risks had been replaced by "an unprecedented level of political risks," although he noted that Republican control of the Congress "offers an opportunity to break the political gridlock of recent years".
Morningstar's Warnes still expects the US Federal Reserve to raise rates in December, with two more hikes likely in 2017.
"We are in for more volatility as 2016 closes and 2017 dawns. I urge caution. I am still comfortable with more cash than usual," he said.
After Brexit and now Trump, Asia's Year of the Monkey has thrown up plenty of mischievousness for Australian investors.
Next year, the Year of the Rooster, promises more of the same.
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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.
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