How will Trump’s actions affect investors going forward?

Due to the lack of a filibuster-proof Senate majority, Trump was never likely able to get much passed through Congress except for revenue-neutral budget bills, but he will clearly continue to use his quite broad executive and regulatory powers, as well as his “bully pulpit,” to re-shape the globe.

The analysis below concisely explores the areas where his policies can be most fully implemented and how his presidency may affect investors going forward.

Immigration

The complaints about building a Mexican border wall have always seemed quite excessive, as there has long been a wall in many sections, which was greatly expanded by Obama without him being pilloried for such. Many countries have border walls, including one recently erected by liberallyminded Norway. Trump is using tactics within the current budget to provide the funds for accelerated construction, but expects Mexico to pay for it eventually. It is noteworthy that only a small fraction of illegal immigrants are Mexican, with the vast portion from countries south of Mexico, and that there are now stronger efforts to stop the flow from them into Mexico, which could solve a major part of the problem.

Trump is clearly open to legal immigration, and will not discriminate by ethnicity any more than the current quota system does, but will restrict such from countries and persons with terrorist risk. Indeed, legal immigration may not decline at all during his tenure. He will also likely restrict H-1 visas (specialist work visas) and seek job and educational prioritization (reducing the number of international students in colleges) for Americans. As for deportation, it will continue along the same criminal-prioritized lines as under Obama, but in accelerated fashion, while sanctuary cities will be forced to comply with federal laws lest their critical federal funding is withheld. There are a few liberal states that, when using a simplistic measurement, send more money to the Federal government than they receive, and will threaten to withhold their funds, but they will likely withdraw when they discover the full consequences of such action.

Economics

In my opinion, there are many reasons to expect that a border adjustment tax will not be enacted, except in the case of a global crisis:

• It would require more regulation, not less (and is likely too complicated to explain to voters).
• It is not in Trump’s original plan and he is trying to fulfill his promises as rapidly as possible.
• He is not a full-blown protectionist but wants fairer trade with Mexico and China (a border tax, which is of questionable legality, is much more protectionist than targeted legal retaliatory tariffs) and will punish US companies who move jobs abroad. His main plan is to lower both corporate taxes and regulation so as to encourage production in the US, rather than use protectionism.
• It would be labeled a hugely regressive consumer tax hike, ruining his reputation with voters and giving his opponents significant ammunition.
• Countries would likely retaliate with a global protectionist war.
• Inflation would be likely even if the USD rose, which would raise interest rates and thus the Treasury’s interest expenses so much that most of the tax’s revenues would be erased.
• It would de-emphasize his power to target specific unfair tactics and decrease the number of victorious “deals.” Already, using Teddy Roosevelt’s “bully pulpit” style, he is achieving success in moving production to the US without regulation.
• He will not totally reject the border tax concept for the time-being because he can use it as bargaining chip/stick against countries, saying “at least, I can save you from Paul Ryan’s more protectionist plan.”
• Although the legality of such is debatable, a special border tax for US companies that move jobs abroad is possible, but such should not raise much revenue. A special border tax against Mexico is also a possibility, but is more likely just a bargaining threat.

If a border tax, which at 20% was estimated to raise $10 trillion over the next decade, is unlikely, then, in order to maintain the ten-year deficit neutrality required for the reconciliation process (which only needs a 50% approval in Congress), Trump will likely only start with a mildly lower corporate tax rate (not as low as he would like and perhaps phased in over several years) and lower personal income taxes targeted at the lower-middle class, both starting in 2018 (later than he had hoped). This would be funded with a mandatory corporate profit repatriation tax, greater US corporate tax base coverage, expenditure cuts and “dynamic scoring” (assuming the resulting economic growth will raise more revenue).

Retaliatory trade measures, already greatly increasing under Obama, will likely accelerate further, with China continuing to attract the vast majority of the cases due to its massive overexpansion in several industries that has attracted retaliatory measures from many countries, both developed and emerging. While there is less concern about across-the-board tariffs on Chinese goods due to currency manipulation, such are likely if the CNY devalues. It is also possible that the Trump Administration deems politically-motivated capital flight to be a non-economic factor and that for trade purposes, the CNY’s current “managed peg” is at excessively weak levels, as shown by the country’s large trade surplus.

As with many countries, infrastructure improvements will likely be accomplished by PPPs (Public-Private Partnerships) and incentives rather than directly by the Government. This is primarily due to fiscal budget constraints. In this regard, it is noteworthy that the budget deficit already is set to widen significantly after 2018 due to increased entitlement spending associated with the aging population.

Regulations

It is unlikely that Trump can change any social laws, as his conservative Supreme Court justice nominations will be filibustered by Democratic senators. He will, however, be able to appoint many Republicans to justice positions lower than the Supreme Court, as such do not require 60 votes in the Senate. Thus, the interpretation of many laws will likely become somewhat more conservative. He will likely de-fund Planned Parenthood, drawing much protest, so the need for private counselling will increase. Many other budget and regulatory cuts are certain, but such will need to conform fairly closely to the current budget allocations. As mentioned previously, passing any non-budgetary laws will be filibustered by Senate Democrats, at least for the intermediate term.

Environmental regulation will clearly be reduced. States and localities can continue to block some deregulations, but there is great danger that Federal funding will be withheld directly or indirectly from them. Deregulation would boost oil production, as well as some industrial and mining sectors, especially coal, significantly contributing to GDP. Not much has been said on nuclear power, but it is highly possible that Trump will reduce regulations for the construction of new reactors.

Foreign Policy

Both geopolitical and economic/trade factors will play equally large roles in Trump’s foreign policy, while Obama emphasized economic factors more greatly. There is little doubt that if there were not so many geopolitical disagreements with China among its neighbors and the US, that there would be less economic friction ahead. Unless these disagreements are solved, then conflict certainly lies ahead. China and the US would both be hurt by such, with China being much more affected economically and politically than it exclaims.

As for Russia, the US will likely cooperate on ISIS and other factors in which there is common interest, and sanctions should be eased relatively soon. As for Mexico, the outlook will likely continue to be tumultuous. Japan, if it learns to be flexible and creative in forging compromises, can actually greatly improve its ties with the United States, but it is often difficult for Japanese corporations and bureaucrats to embrace change, even if it is for their benefit. Relations with the UK will likely be strong, but those with the Eurozone will continue to deteriorate, although if Trump stops encouraging countries to exit the EU, not too much damage will result. The fact that Germany has agreed to start paying its mandated share for defense means that Trump can be satisfied with NATO’s burden being fairer and concentrate on encouraging its antiterrorism effort. Both Japan and the Eurozone will need to be careful that their policies are not considered “monetary manipulation.” Trump has just mentioned this phrase, although in the context of trade deals, as a trend that will be strongly countered, so what his Administration deems manipulation will clearly be a major policy decision for the world, including the Federal Reserve.

The Fed

As long as the FOMC does not become too disdainful of her leadership, Yellen will likely complete her term early next year, although likely very uncomfortably so. Who Trump appoints to the Board and as Chairperson, however, will be a key factor in how FOMC policy evolves this year, as they likely will be quickly approved by the Senate. A few traditional Republican names have been broached by experts, and Trump has shown some support for Kevin Warsh, but a more unorthodox choice is highly possible. Most analysts think that Trump will seek very dovish candidates, but as he complained about Yellen’s Fed being too dovish (although she has suddenly become more hawkish out of fear of fiscal stimulus, despite budget reconciliation likely being revenue-neutral), he might seek a moderate candidate. Such might also protect the bond market from losing faith in the Fed. Although he has courted some Wall Street titans during the transition, it seems unlikely that he would choose one to lead the Fed. Lastly, he likely prefers a reduction of the Fed balance sheet than aggressively raising interest rates.

The US Equity Market

Those who strongly dislike Trump (including most of the mainstream media, Democrats and orthodox policy experts, among others) are experiencing a heavy dose of schadenfreude about him and his policies, but US equities like his plan. The corporate tax cut is the most important factor in raising equity prices, but fewer regulations and stronger economic growth are also crucial. The market’s expectation for earnings are likely much higher than the current bottom-up or top-down consensus estimates, as few analysts are willing to incorporate a corporate tax cut into their projections until they can be sure of its parameters. Portfolio managers and speculators, however, are forced to predict that such a cut is more likely than not and, thus, have bought stocks. We too see such as likely, and thus, valuation ratios are likely much lower than consensus, with a PER on 2018 earnings of near 16 compared to nearly 18 for the latter.

We see continued upside by the end of the year, but there may be some disappointment and market corrections in the coming months as Trump needs to accept less tax rate cuts than he wishes. Within the equity market, those predicting a border tax, and, thus, major earnings growth for domestic producers, will likely be another cause for a market correction. As stated in the Teddy Roosevelt theme mentioned in earlier pieces, investors expecting laissez faire policies by Trump in matters of mergers, non-competitive price hikes or other oligopolistic practices will likely be severely disappointed and may also play a role in a stock market correction.

Summary

There is little doubt that Trump’s domestic and foreign policies conform to the “you are with us or you are against us” theory, as opposed to Obama’s conciliatory “new world” tenor. Such large pendulum swings can be very disruptive, but countries and corporations will likely have to choose sides. Those who choose to back him will likely benefit the most. Clearly, it is difficult to define Trump in political terms, as although nearly all of his cabinet members are either very conservative or of military background, his unorthodox conservative-populist vision, which is often loathed by Republicans, will control the agenda. Domestic unrest certainly could occur, but so far, there has not been such to a disruptive degree and it is very unlikely that if such were to expand that they would dissuade his actions or those of Congressional Republicans. Globally, the outlook is most precarious with China and much will depend upon new geopolitical agreements, which certainly can be achieved and perhaps best left for a more detailed report in the future.

By John Vail, Chief Global Strategist

———

Important Information: This document is prepared by Nikko Asset Management Co., Ltd. and/or its affiliates (Nikko AM) and is for distribution only under such circumstances as may be permitted by applicable laws. This document does not constitute investment advice or a personal recommendation and it does not consider in any way the suitability or appropriateness of the subject matter for the individual circumstances of any recipient. This document is for information purposes only and is not intended to be an offer, or a solicitation of an offer, to buy or sell any investments or participate in any trading strategy. Moreover, the information in this material will not affect Nikko AM’s investment strategy in any way. The information and opinions in this document have been derived from or reached from sources believed in good faith to be reliable but have not been independently verified. Nikko AM makes no guarantee, representation or warranty, express or implied, and accepts no responsibility or liability for the accuracy or completeness of this document. No reliance should be placed on any assumptions, forecasts, projections, estimates or prospects contained within this document. This document should not be regarded by recipients as a substitute for the exercise of their own judgment. Opinions stated in this document may change without notice. In any investment, past performance is neither an indication nor a guarantee of future performance and a loss of capital may occur. Estimates of future performance are based on assumptions that may not be realised. Investors should be able to withstand the loss of any principal investment. The mention of individual stocks, sectors, regions or countries within this document does not imply a recommendation to buy or sell. Nikko AM accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this document, provided that nothing herein excludes or restricts any liability of Nikko AM under applicable regulatory rules or requirements. All information contained in this document is solely for the attention and use of the intended recipients. Any use beyond that intended by Nikko AM is strictly prohibited. Australia: Nikko AM Limited ABN 99 003 376 252 (Nikko AM Australia) is responsible for the distribution of this information in Australia. Nikko AM Australia holds Australian Financial Services Licence No. 237563 and is part of the Nikko AM Group. This material and any offer to provide financial services are for information purposes only. This material does not take into account the objectives, financial situation or needs of any individual and is not intended to constitute personal advice, nor can it be relied upon as such. This material is intended for, and can only be provided and made available to, persons who are regarded as Wholesale Clients for the purposes of section 761G of the Corporations Act 2001 (Cth) and must not be made available or passed on to persons who are regarded as Retail Clients for the purposes of this Act. If you are in any doubt about any of the contents, you should obtain independent professional advice.

The post What does Trump’s first week say about the unorthodox future ahead? appeared first on AdviserVoice.

John Vail

Nikko Asset Management’s Global Investment Committee (GIC) is positive on Japanese and developed Asia-Pacific equities over the next six months due to low valuations in Japan and a bullish outlook for Hong Kong and Australian shares. But the GIC will maintain a slightly underweight stance on global equities amid continued sluggish global growth, geopolitics and uncertainty surrounding the outcome of the U.S. presidential election and its impact on the U.S. economy.

“We have been cautious on global equities since our September meeting last year, and while they have risen 7% in the U.S. dollar terms through September 28th, global bonds have risen 10%,” said John Vail, chief global strategist and chairman of the GIC. “Our new macro-backdrop scenario continues this moderately negative view of global equities, particularly in Europe, but we are bullish on Japanese and developed Asia-Pacific equities.”

The committee members, who consist of senior investment professionals from the company’s global offices, predict that Democratic Party candidate Hillary Clinton will win the presidency, but the Congress will be split, which could make it difficult to materialise her largest plans. Even if she wins by a large margin, there may be a great deal of unrest and continued investigation into her past activities.

With regards to the outlook for monetary policies by central banks, the GIC said the U.S. Federal Reserve is expected to hike in December or March as growth is strong enough to handle a small increase, but, thereafter, the Fed will likely be highly uncertain about any further hikes. The European Central Bank and Bank of Japan will remain on hold for the next twelve months, with the continuation of their QE programmes, but with no new policies.

For bonds, the GIC said bond yields will remain fairly stable for the next two quarters as its new scenario expects continued sluggish economic growth. The committee forecasts the U.S. 10-year Treasury yield to be at around 1.7 percent at the end of March with those for 10-year JGBs and German Bunds at zero.

As for currencies, the yen is expected to stabilise around 100 against the U.S. dollar at the end of March on views that the Fed will not hike rates more than once. For the euro, the ECB is not expected to make any major QE moves and the region will continue its high current account surplus, which could prompt capital repatriation. The committee expects the euro to stand around US$1.13 at the end of March.

The committee met on September 29 for its quarterly review of global economic conditions. Based on the findings of its senior investment professionals around the world, the company periodically reconsiders house views on the major global markets and asset classes.

The committee’s main forecasts[1] at this time are:

• U.S.: Half-year GDP growth (October 2016 to March 2017) of 2.0 percent Half-on-Half seasonally adjusted annual rate (HoH SAAR), with the S&P 500 falling 1.2 percent in dollar terms over the next six months to March 2017.
• Japan: Half-year GDP growth of 0.8 percent HoH SAAR, with TOPIX rising 6.7 percent in yen terms over the next six months to March 2017.
• Eurozone: Half-year GDP growth of 0.8 percent HoH SAAR, with MSCI Europe falling 3.8 percent in euro terms over the next six months to March 2017. 1 Total return from the base date of September 23, 2016

Nikko Asset Management’s series of house views: http://en.nikkoam.com/articles/2016/10/still-cautious-on-a-six-month-view-except-for-japaneseand-asia-pacific-equities

——–

[1] Total return from the base date of September 23, 2016
Note: all dates in this report are Calendar Year (CY)-based unless otherwise specified.

The post Nikko Asset Management bullish on Japan and developed Asia-Pacific equities appeared first on AdviserVoice.

John Vail

Japan, Europe and developed Asia-Pacific ex-Japan equities should perform well in the next six months

A cautious outlook for U.S. equities has led Nikko Asset Management’s Global Investment Committee (GIC) to revise its stance on global equities to neutral from moderately overweight. However, the GIC was positive on Japanese and developed Asia-Pacific ex-Japan equities, the Tokyo-headquartered asset manager’s latest house view showed.

“We went neutral on global equities in September and then went cautiously overweight in December, so we have not been very bullish for a while, but we certainly were negatively surprised by the volatility and bearish action in equities and commodities,” said John Vail, chief global strategist and chairman of the GIC. “Our new macro-backdrop scenario results in a cautious view on global equities, expecting relatively flat performance in the United States, but positive on other regions, especially Japan and Pacific ex-Japan.”

The GIC members, who are senior investment professionals from the company’s global offices, noted that the U.S. equities market is overpriced. U.S. corporate earnings were not expected to improve very much making the current price-earnings ratio unattractive. The S&P 500 is trading at 17 times NTM (next twelve months) bottom-up consensus earnings, which is historically high.

The firm’s key investment committee has an overweight stance on Eurozone equities. The positive earnings effect of euro weakness, expected relief from a vote to reject Brexit and continued regional growth being the main factors to support the Eurozone equities’ overweight view.

With regards to Japan, the committee maintained a positive view that a weaker yen and moderately improved global growth will drive earnings and stock price growth. Also, Japanese equities are supported by strong pretax profit margins which remained at record highs, on an annual basis, as of the fourth quarter.

The committee said it will maintain an overweight stance on developed Asia-Pacific ex-Japan equities amid expectations of significant strength in Hong Kong and Australian equities over the next six months as both benefit from increased confidence in the Chinese economy.

The committee said the U.S. Federal Reserve will raise its interest rates twice this year, once in June and again in December but there is a chance that the June hike could be delayed until July if the central bank wishes to wait for the Brexit vote. The GIC’s forecast of two interest rate hikes this year is more hawkish than expected, thus negative for global bonds but positive for the U.S. currency.

As for oil, the GIC expects Brent crude to trade at $45 per barrel at the end of September and to rise slightly in the following quarters. The committee believes production in the U.S. shale sector will likely decline more rapidly than expected, but Iran is expected to export even more, which should cap prices to a large degree.

Nikko Asset Management’s GIC met on March 30 for its quarterly review of global economic conditions. Based on the findings of its senior investment professionals around the world, the company periodically reconsiders house views on the major global markets and asset classes.

The committee’s main forecasts[1] at this time are:

• U.S.: Half-year GDP growth (April to September 2016) of 2.3 percent half-on-half, with the S&P 500 rising 0.2 percent in dollar terms over the next six months to September 2016.
• Japan: Half-year GDP growth of 1.3 percent half-on-half, with TOPIX rising11.1 percent in yen terms over the next six months to September 2016.
• Eurozone: Half-year GDP growth of 1.7 percent half-on-half, with MSCI Europe rising 8.3 percent in euro terms over the next six months to September 2016.

Nikko Asset Management’s series of 2016 Q1 house views:

• http://en.nikkoam.com/articles/2016/04/g-3-and-chinese-economies-moderately-firmer-in-2016
• http://en.nikkoam.com/articles/2016/04/fed-in-june-and-december-but-ecb-or-boj-slight-easing
• http://en.nikkoam.com/articles/2016/04/forecasting-a-stronger-usd-and-higher-bond-yields-while-back-to-neutral-global-equities

The post Nikko Asset Management expects Japan, Europe and developed Asia-Pacific equities to outperform appeared first on AdviserVoice.

There was a large hue and cry about the recently announced Japanese GDP statistics that indicated that the country was in a recession. There are three important things to know about this, however…

1. Firstly, these statistics often get heavily revised and it would not be shocking to see the most recent quarter revised up into positive territory, especially as there were several anomalies in the data.
2. Secondly, GDP statistics have no correlation with corporate profits in Japan. As our Evolving Markets reports have long-shown, despite lackluster GDP, Japanese corporate profits have been quite strong in the last 10 years. Indeed, in the last two quarters of this supposed recession, Japanese corporate profits have surprised sharply to the upside and grew about 10% year on year; hardly an indication of crisis. Of course, the weaker Yen played some role in this, but service sector profits, including among banks, also surprised to this upside.
3. Thirdly, there are manifold indications that the calendar fourth-quarter’s economy will rise significantly as machinery orders and personal consumption remain on an upward track. Meanwhile, if this recent GDP data leads to further yen weakness, such would also be supportive of the economy.

The political aspect of these numbers however, is more significant and will likely cause the consumption tax hike to be postponed. This is positive news in the short run, as it will allow the economy to grow and the wealth effect to spur future consumption.

It will also likely lead to new elections which should bolster the Abe administration’s hold on power for the next few years and, thus, bolster his ability to reform the economy. In particular, this should increase his ability to push through an agreement on the TPP, which is a badly needed development for Japan

In sum, the bad economic data should not worry investors in Japanese risk assets very much at all.

– John Vail, Chief Global Strategist Nikko Asset Management

The post Abenomics on track despite recession: Nikko Asset Management appeared first on AdviserVoice.

Roger Bridges, based in Sydney, has been named Global Rates and Currencies Strategist; Andre Severino, based in London, has been named Head of Fixed Income for the U.S. and Europe, and John Vail, currently Chief Global Strategist, will be leading the company’s global investment committee process and thought leadership effort after relocating to New York from Tokyo in November.

“In response to the growing needs of our clients, building out our global investment capability has been a priority for us over the past year,” said Yu-Ming Wang, Global Head of Investment of the Tokyo-based asset manager. “We have brought on highly talented individuals and teams from outside the firm, and now we areappointing some of our most experienced individuals to lead areas that will be increasingly important to us going forward.”

Roger Bridges joined the firm in 1998 and has most recently been responsible for providing macroeconomic research and strategic direction to the Nikko Asset Management Australia fixed income team. In his new role, Roger will be the chief global strategist for interest rates and currencies, working closely with the Global Investment Committee on macro and market target views. He will be the main spokesperson for rates and currencies at the company.

Andre Severino joined Nikko Asset Management in New York in 2007, and most recently has been serving as Acting CIO for Europe. In addition, he is Senior Portfolio Manager of the firm’s multi-billion-dollar sovereign fixed income series.  Andre’s position has been expanded to include heading the firm’s fixed income teams in Europe and the U.S., and he will also join the team managing global macro strategies.

John Vail has been with Nikko Asset Management since 2006, and serves as Chief Global Strategist, in addition to leading the Global Investment Committee and several investment forums within the company. Nikko Asset Management is taking steps to deliver its strategic insights within a single, global thought-leadership solution, and John will lead this effort upon relocating to New York from Tokyo in November.

The post Nikko Asset Management adds senior management roles in global investment team appeared first on AdviserVoice.

Nikko AM: reforms will be even stronger than promised before the election.

The outcome of Japan’s election yesterday (Sunday 21 July 2013), which has seen prime minister Shinzo Abe win control of the powerful upper house, will allow a “Super-Abenomics” strategy to be implemented, with the potential to take investors by surprise, says John Vail, chief global strategist at Nikko AM (one of the largest asset management companies based in Asia and the parent of Tyndall AM).

“Many global investors have been sceptical of late about the structural reforms in Japan and the ability of Abenomics to achieve its aims, but at Nikko AM we are not,” Mr Vail said.

“In fact, our belief is that these reforms will be even stronger than promised before the election, and undertaken with alacrity, in what we call ‘Super-Abenomics’.

“In our view, Abe’s victory in the upper house is bullish for Japanese equities and the Japanese economy as a whole, as the removal of political headwinds bolsters the government’s ability to press forward with all ‘three arrows’ of its growth strategy.

“The election result should help drive consumer consumption and thus build wealth in Japan, while the confidence created in government stability may also help corporate capex and housing investment.

“Other major reforms following the election, which I expect will surprise the consensus, include allowing a gambling industry in Japan, approving large scale resorts, and accelerating the restart of nuclear power plants.

“These are controversial issues but will have a positive effect on the economy and, significantly, they mark a huge change in Japan’s willingness to change for growth,” Mr Vail said.

He added that what is being done now in Japan hasn’t been attempted for decades; however, within Japan there is growing belief that this time it will work.

“It’s understandable for there to be some scepticism from investors, but this time is different and investors need to open their eyes to this.

“For instance, the five-year term of an activist Bank of Japan (BOJ) governor, after fifteen years of conservative “BOJ men”, is not a short term change, and the significance of the stability of the prime minister, after a decade of revolving chairs and instability, cannot be underestimated.

“The mere fact that Japan is without crisis of some kind is a major change, but in reality this is just a return to prosperous conditions.

“While the consensus forecast for GDP in Japan for this calendar year is 1.8 per cent, we expect 2 per cent or higher, with more consistent continuing after that.

“Our view is that global investors should be seriously considering Japanese equities, or they may well miss out on major opportunities,” Mr Vail said.

The post Result of Japanese election means stronger and faster reform appeared first on AdviserVoice.