How Bulls Can Trade Trump

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Bill Gross: Trump, GOP Policy Should Favor Profits

Tremors from Donald Trump's shock victory are still reverberating throughout global markets, from equities through to more exotic asset classes, as the Republican victor reshapes the global investment map. Safe-haven assets like developed-bond markets, currencies with strong balance-of-payment positions, and gold, are seeing large bids — while markets in trade-deficit economies tank amid the prospect of restrictive trade policies and weaker investment flows under a Trump administration. 

But there are big potential winners, from healthcare stocks to U.S. banks.

Here's where the smart money is headed, according to analysts who spell out the short-term silver linings in the global selloff.

Equity strategists at Jefferies Group Plc, led by Sean Darby: 

"It should be remembered that Donald Trump sought for the U.S. corporate tax rate to be slashed. Tax cuts get spent! The share of labor vs. capital is likely to grow and this is good news for consumption. We remain bullish on gold shares given that real rates would probably be negative under Trump. Equally, the yield curve is likely to be steep, reinforcing our bullish view on U.S. banks. A more interventionist policy towards trade ought to help domestic intermediate producers (we like materials). We have highlighted before that both parties had committed to infrastructure investment and that the government purse strings had already been loosened. Sentiment towards the Healthcare sector ought to swing initially away from draconian fears over drug pricing. We upgrade the transport sector to modestly bullish on better economic growth prospects."

Equity strategists at HSBC Holdings PLC, led by Ben Laidler: 

"If Trump does follow through on the full extent of his proposals, our economics team believes there could be a short-term boost to GDP growth from tax cuts and increased defense spending, but stagflation could quickly set in if import prices rise and the immigrant labor force contracts. This would be negative for U.S. equities, particularly if countered by tighter Fed policy. We foresee the market's elevated profit margins coming under pressure as costs begin to rise, and believe there will be significant downward revisions to consensus double-digit earnings growth expectations for the next two years. However, we believe U.S. equities could fare relatively well in this environment, given the market's strong 'safer-haven' characteristics — lower than average volatility, a circa 3 percent buyback yield and a large domestic investor base. This is what happened during previous U.S.-centric risk-off events such as the global financial crisis and the U.S. debt ceiling crises in 2011 and 2013, where policy uncertainty spiked sharply higher ... We continue to see sector opportunities in global high dividend yield and non-cyclical growth sectors. These are defensive to a market pullback, benefit from our view of lower-for-longer bond yields, and seem relatively under-owned by investors."

David Kostin, U.S. equity strategist at Goldman Sachs Group Inc:

"Single-party control of the White House and both Houses of Congress has positives and negatives from a portfolio manager perspective. Following several years of gridlock inside the Beltway, the potential now exists for a number of legislative initiatives to be passed. Examples would include fiscal stimulus/infrastructure spending, corporate tax reform, reducing regulation, and addressing rising health care costs. However, the prospect of new legislation also raises uncertainty about policy specifics and may prompt corporations to delay action until details are finalized."

Kostin, whose year-end price target for the S&P 500 of 2,100 remains around 2 percent below the current level of 2,140, adds:

"Trump has discussed the idea of a one-time tax of 10 percent on previously untaxed foreign profits. S&P 500 stocks with the highest earnings invested overseas should benefit from an earnings repatriation holiday. Stocks in our 'High Overseas Earnings' basket hold $1.7 trillion of permanently reinvested foreign earnings, equal to 70 percent of the $2.4 trillion held by all S&P 500 firms."

Morgan Stanley strategists, led by Michael Zezas, cite the upside from potential tax reforms:

"Domestic-oriented consumer industries are most likely to benefit. Conversely, sectors that benefit heavily from existing tax preferences — such as energy and utilities could be moderately worse off, all else equal. Middle-class tax relief could be a key boost to consumer spending."

Citigroup Inc. equity analysts, led by Andrew Baum, have a buy rating on GlaxoSmithKline Plc, AstraZeneca Plc and Shire Plc.: 

"Trump has indicated his intent to press for U.S. tax reform in the first 100 days of his Presidency. This may enable pharmaceutical companies to repatriate substantial offshore cash and earnings without the current punitive tax rate. Given industry pressures from pharmacy-benefit management companies and generic competitors, we anticipate this repatriation could facilitate a significant wave of M&A initiated by U.S. companies."

Citi's aerospace and defense analysts led by Jason Gursky:

"Beyond passing suggestions of abandoning NATO and giving nukes to Japan, most of Trump's defense policy was outlined in a relatively traditional, conservative defense policy speech in early September. He said he wanted to rebuild the Army to 540,000 [soldiers] (from current target of 480,000), grow the United States Marine Corps, Navy ships and Air Force tactical aircraft. This supports domestic sales for all of our covered defense primes. However, defense companies with above-av[erage] international exposure could encounter delays and/or last deals. This includes our favorite defense name, Raytheon Co. (RTN). At the same time, Trump’s support of missile defense plays right into RTN’s sweet-spot."

UBS Group AG strategists, led by Julian Emanuel:

"Defense names are a clear prospective outperformer, and at the sector-level technology likely benefits, a sector holding the majority of offshore cash and, in an increasingly services-oriented world, supported by a stalwart U.S. consumer, largely immune to the slowing of globalization."

 Deutsche Bank AG strategists, led by David Bianco:

"Political strategists will scrutinize the campaign tactics, policies and personalities of the candidates to better understand what happened. But we think the message of this election is that America demands stronger economic growth. Growth lifts and unites the country and perhaps defines the national psyche. Too many sensitive issues get politicized during elections, leaving many upset and divided, but we see this election result as less about sides taken on such divisive issues and rather a 'make growth priority one' mandate; something investors should welcome."

Deutsche Bank's Australia equity analysts recommend gold mining companies (Evolution Mining Ltd, Alacer Gold Corp, and Dacian Gold Ltd) and stocks with high yields, including Sydney Airport, Macquarie Atlas Roads Group, and APA Group. European strategists at the German bank recommend stocks that outperform on "U.S. macro uncertainty", which include Deutsche Telekom AG, Unilever Plc, Sanofi and Coloplast A/S. 

Japanese equity analysts at Nomura Holdings Inc, led by Shigeki Okazaki: 

"Within the paper and pulp and glass and ceramics sectors, yen appreciation versus the dollar and euro may boost earnings at Rengo Co Ltd and dent earnings at NGK Insulators Ltd. Rengo, Japan’s largest cardboard producer, may benefit from increased cost savings for waste paper, its main input, as yen appreciation makes imports cheaper and causes supply-demand conditions in Japan to ease, thereby encouraging waste paper price declines. Elsewhere, NGK Insulators Ltd is a major global producer of ceramic vehicle exhaust gas filters with an overseas sales weighting of around 70 percent, and yen appreciation will dent profits from overseas sales."

Emad Mostaque at Ecstrat Ltd., an emerging-markets research consultancy: 

"With the power structure behind him for pro-business policies, no Fed[eral Reserve] hikes and increased spending/borrowing, the yield curve should start to steepen in due course as the market extrapolates into the future, potentially helping a rotation back into stocks that, in the U.S. much as in the U.K., benefit from a weak dollar. There will be significant sector rotation within the U.S., but the asset allocators remain stuck on potential investment locations, particularly if duration reverses much as we have seen gilts do and inflation creeps back in. Brexit also led to a resumption of flows into [emerging market] hard currency debt in particular and if EM countries can weather the near-term volatility that should take the Turkish lira, for example, to 3.4-3.5 (probably 5-10 percent on EM currencies overall, 10 percent-15 percent for most markets), they suddenly become very interesting on a comparative and carry-basis versus [developed market] stocks for the first time in years, barring export exposure and an escalation of a trade war. Devaluations have already been undertaken in many countries and rate cycles in some are peaking, but most important for the mass of U.S. money, they provide much needed diversification, especially if the EU starts to look weak again after the Italian referendum and peripheral spreads start to widen. The relative size of these flows is likely to close the valuation gap markedly."