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Trump presidency creates opportunities says WisdomTree


WisdomTree’s Viktor Nossek, director of research, has commented that Donald Trump’s surprise election as US President has created a number of opportunities in US equity markets, with his mooted and controversial policies likely to have a widespread impact across many areas of the US economy.

Nossek says Trump’s policies have the potential to reverse last year’s uptrend in broad US equity markets to new highs.

Conversely, he says if investors are sceptical about Trump’s ability to implement his plans, defensive sectors still look attractive, with a combination of solid earnings and dividend growth and low price/earnings expansion in their favour.

“As we start 2017, the unknown for investors is whether Trump will actually enact many of his election promises, or whether they will be watered down (or blocked) as they go through the various stages of being enshrined in US law,” Nossek says.
“That said, it is possible for investors to position their portfolios around the potential outcomes if they have a view on what they expect Trump will be able to achieve.”
For those investors who expect Trump to be able to instigate his range of policies, Nossek said cyclical sectors which lagged peers under the previous administration may offer the best route forward.
“If you believe Donald Trump’s policies are going to succeed and accelerate economic growth then a focus on stocks with low leverage, high profitability and the ability to cash flows in a select number of sectors Trump is looking to reinvigorate now looks attractive,” Nossek says.
“Along with Health Care, the sectors for consideration are Industrials, IT and Consumer Discretionary which, bar from a few companies overwhelmingly reported disappointing earnings last year, could see their earnings growth projections upgraded when corporate tax cuts and infrastructure spending programs become law”
On the flipside, Nossek says investors who believe the new President will struggle to see through many of his policies should focus on stocks offering quality and security.
The consumer staples and real estate sectors were a focus for many in 2016, with the recognition that these businesses can grow regardless of the economic backdrop boosting share prices.
While valuations have soared, Nossek says their ability to generate cash and thus enhance dividends means they remain attractive, especially if Trump’s policies fall flat.
“There is enough room for these trends to run further this year, especially as following a period of valuation growth it can now enjoy some earnings per share growth in 2017 if investors stick with past winners.”
Nossek also believes there is a middle ground whereby neither extreme materialises, and in this scenario Nossek says focusing on US small caps could be the best solution.
Small caps enjoyed very strong returns in 2016, outstripping the wider US market. The Russell 2000 Index rose 20.8%, while WisdomTree’s Small Cap Dividend Index gained some 31.4 per cent.
“The opportunity here for investors is two-fold” says Nossek. “There is the relatively high dividend available, while investors are also getting exposure to sectors which could benefit from some of Trump’s proposed plans.”
The risk for small caps is the elevated valuations. With the sector on 25 times earnings on average, there is little room for companies to miss expectations, and much of the “Trump effect” has already been priced-in.
“Any retrenchment from Trump puts the valuation premium over the broader US equity market at risk,” Nossek adds.

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