Trump Cards: What Hand Have Investors Been Dealt?

Trump on economic policy

Thursday, November 17, 2016 wecbcast by Caroline Miller, BCA Research. She made following points:

• Infrastructure program and tax cuts will increase budget deficit
• Tax reduction will not give a lot of bang for the buck compared to government spending programs regarding GDP growth
• Fed pressured by Trump policy to increase rates, leads to USD strength
• Europe needs 3 to 4 years to return to growth, Europe will not match rate increase
• Japan has still low inflation
• China is exporting structural deflation (overcapacity)
• Dollar strength, Trump protectionism will hurt emerging Asia most
• High corporate debt level in emerging markets
• US Equity: no visibility of corporate earnings growth, wild card of Trump appointees
• US protectionism and backlash are a threat to growth
• US deficit will steepen yield curve
• Trump tax program will benefit small caps not multinationals

Investment recommendations:

• Underweight of duration in US bonds, preference of TIPS
• Underweight of peripheral european bonds
• Overweight of USD vs. EUR
• Overweight in pharma, staples, utilities (defensive stocks)
• Underweight in tech, industrials and commodities (cyclical stocks)
• Underweight in US vs. European equities: strong USD will hamper US profits. Profit margins are very high in the US historically and compared to Europe. They can't grow on that level

We have entered a new economic environment in the US.

Investments and Demographics

BCA Research has published a special report about the economic implications of an aging global population:

• Global population growth has nearly halved over the past forty years and the labor force is expanding very slowly. 
• Health among the elderly in the OECD has been improving, but not quickly enough to compensate for the secular impact of aging.
• The reduced labor force participation rate among the 16-24 age cohort is reflective of deep social changes that won’t be easily reversed.
• A smaller potential workforce will not turnaround the slowdown in real wage growth because of technological destruction.
• An aging population and economic growth in the developing world will create an almost insatiable demand for health care services and products.
• Entitlement will increase as government revenues will be under pressure. Taxes have to rise.
• A more serviced based economy will have less need for energy.
• A smaller workforce means also a slower growing economy, as Japan is already experiencing.

BCA November Forecast

Latest Forecast from BCA:

• The monetary tailwind for global equity prices is strengthening, but the earnings support is weakening.
• It might be necessary to inject more fiscal policy into the mix to rekindle activity.
• Learned behaviors are still supportive of risk assets and more QE in Europe/Japan can be expected.
• Even if the Fed does raise rates in December we doubt more than one or two more will be in the cards.
• Stay neutral on equities, but position defensively and remain long duration in the bond markets.

BCA September Global Market Outlook

Keypoints of BCA Research's latest Report:

• Markets are expecting too much of policymakers who are behind the curve.
• The Fed is unlikely to raise rates in September, given the recent market volatility.
• This is not just a repeat of the 2013 taper tantrum as it reflects very real concerns about global growth.
• Stay neutral on equities, overweight in Japan and Europe and underweight in the emerging markets.
• Further fiscal ease in China and additional exchange rate depreciation would be a game changer for both the emerging market and global view.
• A non-technical recovery, driven by improved perceptions of global growth, could produce a sustainable recovery in high-beta sectors such as Energy, Materials and Industrials.

BCA Webcast: Geopolicy and asset allocation

This is a rather technical piece about geopolitics and asset allocation.
On February 19th, 2013, BCA has held a webcast about "Global Asset Allocation/Geopolitical Strategy Forecast":
USA
Less policy risk due to bipartisan collaboration (although politician still make a lot of noise with extreme positions, behind the scene they are compromising). Normalization of interest rates (i.e. rising interest rates from today's super low levels) is not anticipated by markets today, and could cause problems in the future. Rising yields are bad for bonds, equities and gold.
Europe
France's problem (low productivity) is hiding bhind Italy and Spain. The implementation of structural reforms in Italy in Spain is unsure as their governments are very weak (Monti is gone and Rajoy is weakened by accusation of corruption). But GDP  could grow as austerity policies cease and as exports to growing China and USA rise.

Asset Allocation
We are in a liquidity driven bull market, so don't be underweight equities, especially cyclical stocks (keep your beta high). But liquidity rallies tend to turn around quickly. Hedging with puts on equity indices is prudent. Moreover, we are priced for perfection.
Currencies: Every country is trying to strengthen economic growth by weaken their currency (beggar thy neighbour policy). EPS growth will be influenced as well as the value of respective bond positions.

BCA's Outlook for 2013

BCA Research gives an outlook for 2013:

• Positive surprises are likely in three important areas: the euro area crisis, Chinese economic growth and U.S. fiscal trends.
• The euro area has made good progress. The region should exit recession during 2013, but it will be several years before we will know for sure if the euro can survive.
• The Chinese economy has already started to improve and fears of a hard landing will continue to fade. 
• U.S. politicians will not send the economy over the fiscal cliff.
• The U.S. Debt Supercycle ended in the private sector in 2007, but still lingers on in the government sector. Most likely it will require a market crisis to force politicians to reform.
• Global economic growth should improve in the coming year, but not by enough to put pressure on inflation.
• The search for yield will remain an intense investment theme, implying that high-dividend stocks and fixedincome spread product should continue to do well in 2013.
• Global equities should continue to grind higher against a backdrop of reasonable valuations and easy money. Nevertheless, we only look for total returns from a global equity portfolio to be around a modest 6%.
• Euro area equities should outperform those of the U.S. An improved global economy should also translate into better performance from emerging market stocks.
• Commodities should do better in 2013 on the back of stronger demand. However, gold is likely to
• trade in a range. Commodity prices look vulnerable from a longer-run perspective given their elevated level and the beneficial impact of technology on supply.