Investment considerations for Australians in the new Trump era

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Last month’s inauguration of the 45th President of the United States has the world talking. There has been and will be countless column inches about Donald Trump and while I’m reluctant to add to the noise, the US is still the largest economy in the world by some measures, and remains an important asset market for our investors. So, in this new world of politics, what should Australian investors consider when reviewing portfolio options?

Since inauguration, the actions of President Trump has mirrored that of Candidate Trump 

Trump consistently campaigned on anti-free trade, anti-abortion, anti-Obamacare and anti-immigration; and since taking office has now signed executive orders to these and other items. Yet despite media coverage of worldwide protest, his powerbase seems to be applauding him for it.

We previously noted our view that Trump’s key appointments will provide insight into his likely style of governing. Trump’s cabinet picks have in the main been his own, unmoved by any influence of the mainstream Republican Party, and as such, to us suggests an increase in the unpredictability of the administration.

More of a concern is his ‘casual humiliation’ as the Financial Times called it, of those conventionally considered his closest allies – notably Mexico – but this is also applicable to Australia. This behaviour appears to be marking an acceleration of a US withdrawal from global policing duties. The geopolitical implications of this are very hard to predict and, as we have said before, markets find it very hard to price in geopolitical risk.

We believe that the high level of stock market valuations and the low level of volatility (as a measure of risk) are not a true reflection of the uncertain times we are dealing in, and in our view they do not provide adequate likely returns to compensate for this perceived risk.

What has not changed with the ascension of Trump are certain economic fundamentals

From very high global debt levels and the low share wages have of corporate earnings to low productivity growth and poor demographic drivers in the developed world, some significant global headwinds remain. Despite this, markets appear to be anticipating the positive possibilities of the new administration and none of the negatives we see as potentially consequential.

While all this appears fairly bleak, remember that the US is still fundamentally one of the stronger economies in the world. Unemployment is relatively low, inflation is positive and growth – while unspectacular – is decent. To paraphrase one of the most successful investors in the world, Warren Buffet: the US will continue to work under Trump – don’t bet against America in the long run.

The US ‘checks and balances’ system is built to cope with an unruly executive

Checks and balances are baked into the three branches of the US system – legislative, executive and judicial. The judiciary is stirring, which is restricting the effect of Trump's ‘Muslim ban’. And how the Republican-controlled Senate and House react to Trump’s policies will likely depend on his popularity ratings – the lower they fall, the more likely it will be that there will be push back on the wilder schemes.

So, what strategy should Australian investors employ?

As the British philosopher, political activist and Nobel Laureate, Bertrand Russell said, ‘Ask yourself only what are the facts and what is the truth the facts bear out’. To that end, in our view, it is important to try not to let the volume of noise and misinformation bury your fundamental views, which for us remains one of caution.

Despite all the furore and recent positive equity market moves, we maintain our view that Australian investors should generally hold sensible cash levels, a diversified portfolio including a proportion of real assets, some exposure to the US dollar, exposure to markets where demographic drivers are strong, and a bias to value over growth.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward-looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.

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Patrick Broughton

Investment Committee Chairman

With 25 years’ global investment banking experience in a broad range of financial markets, including equities, fixed income, hybrids and convertibles and foreign exchange, Patrick Broughton is charged with chairing the Dixon Advisory Investment Committee.

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