Portfolio manager at Royce & Associates, Bill Hench shares his thoughts on Donald Trump, risks to watch out for, and how he thinks the stock market will perform.
Royce & Associates is a wholly owned subsidiary of Legg Mason, a global asset management firm with US$710bil (S$1.001 trillion) in assets under management as of the end of last year.
The company provides active asset management in many major investment centres throughout the world.
Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange.
Below are excerpts of the interview:
Feedback on inauguration:
The biggest surprises from Donald Trump's inauguration speech is how well they've been able to control the message.
In other words, the media seems to be very much in a reaction phase.
Every time they want something to be talked about, the administration appears to be the one that can direct the message with unbelievable skill, which lead you to believe that perhaps they're making everybody look left so they can do the things that they really want to do over here.
Probably the biggest risk now is that these things - the taxes, the regulatory changes and the infrastructure spending don't materialise.
And if that happens, I think that will create a lot of disappointment.
But also I think it could be very, very demoralising for the country as a whole.
I think even people who don't necessarily support the current administration still realise that some of these things that are going to be done or are going to be attempted to be done are really going to be in everybody's best interest.
Implications for Asia:
If we could get the US growing at a much better clip than it has been, I think both as a customer and an exporter that should help globally.
It is still - this is still an economy that is the largest in the world right, and as such, just as any better economy whether it be in Asia or in the EU would help the US, I think the stronger US would benefit most economies.
Impact for US small cap stocks:
So we've started out okay. We haven't really moved.
I think the Russell Index is probably down a couple of basis points for the year, maybe 30 basis points I think.
So not much yet. We're in this position now where stocks have moved.
They've moved up since the election especially in some sectors like infrastructure, but we haven't seen any corresponding change to business.
You're not going to see anything in these coming days as companies continue to report.
But we think going out six month, nine months, you should start to see evidence.
And if we don't, then we'll have to spend some more time on those risks.
On stock valuations in the US:
So if you looked at the valuations, there are always - no matter what part of the cycle you're in, there are always those parts where things look very expensive and some other things look cheap.
So specifically, now post-election, those things that we had talked about infrastructure, they've moved up, they're discounting.
Some big changes in the environment there.
So those things aren't as cheap as they were.
However, on that same day when things started to get better with the infrastructure, the healthcare stocks did exactly the opposite.
And in point of fact there were some huge moves to the downside the day after the election on the assumption that some of the changes perhaps in the Affordable Care Act would be felt really, really hard in some of those hospitals and other healthcare facilities.
So it's pretty normal, okay.
You've got some part of the markets that look somewhat stretched and you've got other parts that look somewhat neglected.
What we think is that there's still enough of those things that don't reflect what should be a pretty good economy going forward.
In terms of technology sector:
I think the one thing, if there's one trend that sticks out, it is the tremendous build-out that's taking place around the world relating to artificial intelligence, autonomous driving and the build-out of the public and the private clouds.
So, a tremendous amount of hardware, software devices, you mentioned semiconductors are being utilised and it doesn't get the attention that you'd have thought it might get.
But if you speak to the big producers of capital equipment and semiconductor business, you'd be surprised at just how strong their outlook is for not only 2017, but for 2018 as well.
So we think both the devices that are being used in these big build-outs and if you also include the Internet of Things in there as well and the specific hardware that's used, the semiconductor capital equipment are really, really very interesting places to look.
On the software side anything related to defence of your infrastructure, or your materials or your data are also very, very strong.
On the eight-year bull run in the US. Will it benefit from Trump's policies:
I think the benefit from the policy, whether they be tax or regulatory or infrastructure spend, would be growth.
Better growth cures a lot of ills.
And we have had this really good stretch and the market, you've seen what the market has done.
But really the market has also reflected you know, these extraordinary events that have happened.
Like you've had quantitative easing (QE) - I mean we've had three QEs right. We've had very low interest rate policies.
So we've had a very distorted market as opposed to other periods, post-recession or severe recession right.
So there was more than enough firepower out there to get asset prices and specifically, stock prices up for a while.
But now what we're looking at is we're looking at advances from sort of the more normalised or traditional methods right.
Earnings getting better, costs being contained. And let's think of some of the ridiculous things that have happened.
You know we spent all last year in the US worrying that oil prices were too low.
You know it had to be the only time in my life where I saw so many economists getting on television and telling us how silly we were to want lower energy prices.
Now for a country that is two-thirds of a consumer, it's sort of bizarre.
Yet it was taken as a given that this was not really good.
So it's a longwinded answer, but I think that business adapts and returns margins all can be pretty good and get better in an economy that grows possibly twice of what it grew last year.