Trump effect on the stock market

Hench: ‘There are always those parts where things look very expensive and some other things look cheap.’
PHOTO: The Star/Asia News Network

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.

Trump sworn in as 45th US president

  • President Donald Trump assumed power Friday with a fiercely nationalistic vow to put "America first," declaring a new political era after being sworn in as the 45th US head of state.
  • Hundreds of thousands of people stood in the rain-splattered National Mall to see the 70-year-old Republican billionaire take the oath of office and deliver a stridently populist call-to-arms.
  • Former US president Jimmy Carter and his wife Rosalynn arrive for the inauguration of President Trump.
  • Former US president Bill Clinton and former Secretary of State Hillary Clinton.
  • Former US President George W. Bush and his wife Laura.
  • Bush put up a struggle with his poncho.
  • American casino magnate Sheldon Adelson, a donor to the Trump campaign.
  • Senators Bernie Sanders and John McCain.
  • "From this day forward, a new vision will govern our land," Trump said, promising an end to business-as-usual in Washington.

    "From this moment on, it's going to be only America First."

  • "Today we are not merely transferring power from one administration to another or from one party to another, but we are transferring power from Washington, DC. And giving it back to you, the people."
  • While the US capital city no longer provides official crowd counts, the turnout was visibly smaller than for Barack Obama's two inaugurations, in 2009 and 2013, with sections of the Mall and bleachers along the parade route left empty.
  • And as the incoming leader rallied his supporters for the swearing-in, throngs of his opponents also converged on Washington.
  • Most of the protests - by an array of anti-racist, anti-war, feminist, LGBT, pro-immigration and marijuana legalization groups - were noisy but peaceful, though sporadic violence marred the day.
  • Between 400 and 500 masked, black-clad protesters carrying anarchist flags smashed windows, lit fires and scuffled with riot police in downtown Washington, blocks from the parade held in Trump's honour, with over 90 people arrested for vandalism.
  • Even the peaceful protesters were intent on spoiling Trump's party - letting out a deafening roar as the presidential limousine known as "The Beast" rolled by on the way to the White House.
  • "Not my president! Not my president!" they yelled, as the pro- Trump crowd in bleachers across the street chanted "USA! USA!".
  • Trump's inauguration caps the improbable rise to power of the Manhattan real estate magnate who has never before held elected office, served in government or in the armed forces.
  • His speech was far from the typical optimistic inaugural address that tries to bridge political divides and lift Americans' gaze up to the horizon.
  • It was a deliberate and striking contrast from the uplifting message of Obama, the outgoing president who was among the dignitaries in attendance.
  • Obama and his wife Michelle departed the Capitol by helicopter moments after the swearing-in ceremony, turning a page on eight years of Democratic leadership in the White House.
  • At a Congressional luncheon afterward, Trump led a standing ovation for his defeated election rival Hillary Clinton, saying he was "honoured" that she and her husband, former president Bill Clinton, attended his inauguration.
  • When Trump descended the escalators of his glitzy New York tower in June 2015, his run for office was roundly dismissed and even mocked.
  • Trump and First Lady Melania Trump dance during the Armed Forces ball at the National Building Museum.
  • Trump, the first lady Melania Trump, US Vice President Mike Pence and his wife Karen cut a cake after dancing at the Armed Services ball.

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.

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