Monthly Letter January 2017
It is quite natural that the new President of the United States, “the most powerful man on Earth”, draws a lot of attention, but Donald Trump has certainly also managed to create some headlines by his own accord. He did not wait around before firing off executive orders from the Oval Office. When Trump was elected we (and most likely a large part of the investment community) believed that a lot of his election promises would be watered down or maybe even scrapped altogether. So far we couldn’t have been more wrong; Trump seems intent on delivering on everything he said he would do during his campaign trail. Whatever you think about his policies, it is certainly a big change from your average politician. As our usual stance that “economic realities will limit and put a lid on most campaign promises” has been proven wrong, we need to rethink how this change will affect the investment landscape both in the short run and the long run.
The policies where we thought he would backtrack the most, were the ones concerning movement of people and goods. We are not looking for the political angle of these policies, rather just how we think it will impact the economy and our investment landscape. There are two things that concern us the most. Firstly, increased subsidies of traditional manufacturing industries and the potential disruption of global supply chains. Secondly, a diminished U.S. role as a global leader with increased focus on national security, which could have significant implications for allied nations. The first will have direct implications on company profits and trade-flows as soon as they are implemented. The second issue is more of a risk premia issue that is very difficult to put a number on, but the risk seems skewed towards the downside at the moment (i.e. higher risk premia which would mean lower equity prices). Moving on to more tangible issues we are seeing Q4 earnings being slightly on the better side coupled with macro numbers that are also surprising on the upside. This is supportive and we still believe that this will be the driver in the immediate future even if we are cognizant of the risks we discussed earlier.