Last Friday provided possibly one of the more incongruous sights we’re ever likely to see. A slightly “day-glo”, septuagenarian billionaire (apparently) giving a Citizen Smith-style fist salute to the watching world as he assumed the mantle of leader of the world’s largest democracy and Commander-in-Chief of the world’s largest army. The juxtaposition is exaggerated by the “power to the people” rhetoric that a Wolfie Smith of the 1970s might have been proud of. The early days of his tenure suggest that the Donald the President might be closer in style to the Donald the Candidate than some might have hoped. So, hyperbole and post-truth will be part of the landscape that we as investors need to get used to.
The rhetoric may be one thing; it is a whole lot more important what his actions might be. Right now, we are in the realms of speculation. Whilst the Republican party controls the Oval Office, the House and the Senate, and has a pivotal pick for the Supreme Court coming up, it is not a party that is as one with itself, and nor is it clear how the majority of President Trump’s campaign pledges sit with fiscal conservatives who dominate in the Republican cohort in Congress.
Fortunately, some of the things that he should be able to do offer some justification for the upward lunge of stock market values since his victory. The most obvious is to deal with the US’s dysfunctional corporate taxation system. Corporation tax rates in the US are the highest in the G7, and substantially higher than in many international trading centres like the UK. The US also has the most penal tax treatment of overseas profits in the G7. When profits in overseas subsidiaries are repatriated back into the US, they are taxed again at the US rate of corporation tax, less local tax already paid. Because US tax rates are almost always higher than the local rate, that means more tax is due. This is a significant disincentive for US companies to bring their cash back to the US and reinvest it domestically. Some estimates suggest that there is more than $2trn of US company cash sitting in overseas bank accounts. By cutting domestic corporation tax rates, a Trump administration would immediately reduce the incentive for domestic businesses to offshore production, and would encourage the repatriation of huge sums of money back into the domestic economy. This should be achievable as a policy objective.
Beyond this, more horse trading might be required. Fiscal expansion to invest in infrastructure is likely to meet resistance from fiscal conservatives, but if the quid pro quo is the repeal of Obamacare (either in part or completely), then the Donald might get his wish. Guessing any further than this is probably too much of a leap into the unknown. There are undoubted risks that go alongside these potential upsides. The world’s two largest economies going head to head in a trade war will be bad news for everyone – even the US.
Closer to home, we are not short of our own political upheaval. Our own prime minister confirmed that Brexit does indeed mean Brexit. In the absence of another referendum or General Election, we are likely to leave the single market, and then look for the best trade deal possible. Make no mistake, we are not pro-Brexit, and in our opinion leaving the single market will damage us all. But, if we are to leave, it seems perfectly sensible to make it beyond doubt that the divorce will happen, and leave the negotiation solely focused on what type of trading relationship Europe wants to have with the UK. Hopefully time and self-interest will take some of the heat out of what will inevitably be fractious negotiations.
Set against all of this, we still need to get on with the day job. January is always interesting, as not only do we get confirmation from many businesses over the out-turn for the year just passed, we get an early look at profit guidance for the new year. First out of the blocks are normally the retailers. Across the board, trading over Christmas and into the new year looks to be “OK”. Share price reactions to trading statements imply that most had been pricing in modest downgrades to expectations. Those retailers who confirmed that there was no change to profit forecasts mainly saw share prices rise. However, any further slight reduction in profit forecasts was still treated without mercy. Clothing retail giants Next and AB Foods (Primark) have fallen significantly in share price terms at the start of this year in response to muted trading and worries over profit margins in the coming year.
Outside the retail sector, trading statements have pointed to levels of economic activity in keeping with expectations. Where there have been shockers (e.g. Pearson), it has typically been driven by company specific factors.
All of this is in keeping with recent business survey data. Across the developed world, PMI data continue to point to decent – if unspectacular – growth. Employment rates continue to grow, and consumption has an upward trajectory. If government and business investment can be brought into similar levels of growth, then it would make for a compelling equity backdrop.
Yet, it is unlikely that events will unfold in such a sanguine manner. Springtime will bring the triggering of Article 50, Dutch general elections and the French Presidential election. Even without the influence of the Donald and his apparent working man crusade, there is more than enough potential for worry and angst to keep equity investors sober.