339. What investors needs to know about a Trump victory

6 November 2024 (pre-recorded 6 November 2024)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

James Yardley (JY): Hello and welcome to the Investing on the go podcast for our post-US election special. Today I’m joined by Justin Streeter to help make sense of all of this. He’s a portfolio manager on the Comgest Growth America fund. Thank you very much for joining us, Justin.

Justin Streeter (JS): Thanks for having me James. Hi, everyone.

[INTERVIEW]

JY: So to just give an overview of where we are now it’s now 10:00 AM on the 6th of November. We’ve woken up, it’s pretty clear at this stage that Donald Trump is going to be the next President again. He seems to have won fairly comfortably. He seems to be leading in every single battleground state. And that race, I think, is pretty much done now. We’re gonna discuss what that means for markets for your investments.

In terms of the other races which are still going on, the Republicans do seem to have won the Senate as well now. So they have gained the two seats they needed there to get a majority. So we are gonna get a Republican Senate and the House of Representatives is the one which is really up in the air at the moment. I think the expectation is that the Republicans are going to win it, but there are still some races going on in California, which are unclear. I mean, that will have big implications because it will make a big difference to Trump’s presidency if we have a complete Republican sweep, and they can obviously do a lot more of the things that they want to.

So Justin, I’ll come to you then. So what is your immediate take from all of this, your reaction, how do you see it playing out in terms of the House and how do you see what this means for equity markets and other markets as well?

JS: Thanks James. Yeah, so I guess the first caveat would be that we are bottom up stock pickers. We are not political analysts. We’re not macro analysts. So grain of salt with everything as this is not really our, the top down is not really our field of expertise. Actually, on average, we hold our companies for more than five years, so five and a half years and for our larger weights more than 10 years. So by nature of our holding period, we overlap election periods you know every four years cycle. So we look for companies that can have all weather franchises that can that can do well in any environment. That said as you spoke about the red sweep will have consequences.

And taking a step back, it’s understandable that people voted to some extent with their feet in terms of the economic issues. We’ve had high inflation, we’ve had some spending issues, some regulation issues that people were not happy about. And so we’re likely to see you know, some changes. And one of the key changes that Trump has been talking about is on the tax rate front where he’s looking to lower tax spending to put more money into the pockets of companies and employees and consumers. It’s not clear how that would have a deflationary impact, but but it will likely have an impact on the bottom line in the short term. So that’s the first thing to keep in mind.

We also know that the Biden administration has been a little bit more focused on curbing the power of large corporates. And so in terms of a regulatory overview, the DOJ overview some of these large companies, and it looks like a red sweep would potentially have less red tape or corporate oversight, we’ll see. And so lower taxes would help more domestic companies. So smaller cap pure domestic companies that have a higher tax rate than multinationals that are taxed around the world, that can kind of benefit from advantages tax regimes around the world. The regulation front would potentially help larger companies that are more penalised by high regulation. So there’s a little bit of both there.

We haven’t talked about tariffs, we haven’t talked about other things, but we know that there’s going to be some volatility, some uncertainty. That’s something that Trump – it’s one of his trademarks. It’s being a little bit unpredictable. And so what gives us comfort in terms of our positioning, our portfolio, is that our companies are best in class companies and they are able to adjust to changing circumstances.

JY: Yes, I guess the headline policies, which will really impact markets, I guess will be the potential cut to corporation tax the reduced regulation. And Trump has obviously said he wants to drill as much as possible. And then of course the tariffs. Now, I mean, the interesting one here is, I mean, what do you think this means for inflation? Because interestingly, a lot of voters have voted for Trump probably because they were fed up with the inflation, which they’ve experienced for the last few years. But I think the market’s expectation is that Trump is probably gonna be quite inflationary. And you’ve seen that in the initial reaction in the bond market with bond market yields up. Is that correct? And is that because of these potential tariffs are they gonna be inflationary?

JS: So, well, interestingly, Trump and Harris both had an element of stimulus in their plans with different destination. But there was a spending plan in both programs, and so there wasn’t much campaigning on terms of reducing the deficit. And that is by nature inflationary. And then we’ve seen the central bank chair Jerome Powell saying that, you know, the central bank will, which has done a fair amount of work in getting US down, in getting the inflation down with the monetary, raising rates so that there’s less money in the system. And so inflation has come down to these 2 to 3%. But they’ve said for a long time that monetary policy alone can’t solve the structural problem of inflation.

And so they would like more help from basically a fiscal, so tax policy, if you raise tax rates that is disinflationary, you have less money in the system. And that is what Kamala Harris wanted to do, raising the raise to 28% from 21% corporate rates. Trump is saying he will reduce them from 21 to 17%. So that’s putting more money into the system. So obviously you know, more money in the system chasing the same amount of goods is inflationary. Tariffs potentially could be inflationary. We’ll see over the long term the X mark being whether you can replace goods with whether you’re supplying the same amount of goods with domestically produced goods, or if there are fewer goods coming in because inflation is the amount of money chasing the amount of goods. And so depending on how many goods you have coming in, that’s the question.

And then the last one is labor policy, where migration plays a role in inflation as well with wages. In the near term it’s hard to see how the policies aren’t inflationary. But what’s interesting is that people…

JY: I guess maybe a counter is on the energy side, if he does encourage more drilling and allow that, I mean, could that have a meaningful impact or is that likely to be overwhelmed by the other policies?

JS: That could have an impact. Oil production has increased under Biden, it had increased under Trump, it had increased under Obama. So it’s not clear to what extent it’s being curtailed right now. But it’s you know, that could have an impact at the margin.

Another interesting thing is obviously inflation is also driven by the consumer. The US GDP is 70% consumer driven, and there is this study showing that people tend to pause spending a little bit during the election year. So they looked at the home, so house prices and home appliance prices like your fridge and and other types of more cyclical goods. And they showed that price that people paused spending a little bit during the even years. So 2020, 2024, 2016, and during the odd years those prices and those spending recuperated because people like to take a breather and kind of see where the cards fall before making major life decisions. And so that’s kind of the X factor is are people you know, it’s the confidence in the economy, it’s the confidence from the consumer. Do they want to keep their money in savings? Do they want to go out and spend? And so that’ll be a determinant for inflation as well, obviously.

JY: And what implications do you think this result has for the Magnificent Seven (Mag7) and Big Tech? I think there was perhaps a perception before that Trump wasn’t a huge fan of Big Tech, but that seems to have changed this election campaign. Obviously Elon Musk has been a huge vocal supporter of his, it seems like Silicon Valley has really changed their tune and got on board, and there’s an alliance there with Trump. So is this a good result for Big Tech and AI and all that sort of stuff?

JS: That’s a good question. And you know the Mag7 makes a lot of headlines. We have some of those in the portfolio. Taking a step back, it’s interesting, I don’t think a lot of people have in mind that over the last, one year, three year, five years, people think that there’s only five companies that do better than the S&P 500, but there’s actually if you look at the components there’s more than 200 companies that do better than S&P 500 over one year, or three year or five years. So about 40 something percent of the companies, which makes sense because the S&P is a weighted benchmark, even though some companies are getting larger, but not every Mag7 has done better than the S&P over one year or three or five years. And so that’s, that’s one thing to keep in mind.

Now the focus on the Mag7, there has been a little bit of evolution. I mean, we know that the tricky part is that President Trump has a stake in social media. He has through social, he has he’ll likely give a key role to, to Elon Musk, who also has a stake in social media which, these companies typically get their money from advertising. So it would look like there’s a bit of a conflict of interest in the advertising space there and the social media space. That said, and I think most recently he said that he wouldn’t like to break up Google while Google is undergoing currently the DOJ investigation, because he says, his words are – China is afraid of Google – which is important to keep in mind that these are large local players. And so we will see what the new administration’s approach is.

But as I mentioned, I think there was a stat the other day showing that you know, 60% of the S&P 500 is under DOJ investigation right now, 60% by market cap, because they are large companies, and there has been more of a willingness in the current administration to go after the large corporates a little bit more intervention in terms of like the corporate space. And so that would likely change a little bit. Now the difficulty is there is a bit of a conflict of interest. So we’re not sure how this will play out in the near term.

JY: Very interesting. And so as we record this, I mean, we’ve got US equities up. We’ve actually got European equities up, which was a bit of a surprise to me. Given the theory of tariffs, Chinese equities are down as expected, given that’s where the greatest burden of tariffs is to fall. I mean, I know you are a US manager, but what do you think this means for global equities, and particularly for places like China? Does this, are these potential tariffs gonna be devastating for them?

JS: Really asking me to go beyond remit. Well, actually, you know, in our portfolio we have about 60% of the revenues from the US and then the two next largest regions are Europe and then Asia. And so we do keep those regions in mind.

Obviously it’s not clear to me that there’s a lot of low hanging fruit. I mean, I think the world is…let’s say there’ll be, you can call it tit for tat or you can call it transactional, or you can call it multimodal or something. But if you change one thing not everything else stays the same. So we’ve seen with the European approach to put tariffs on EVs and then China said they would put their own tariffs on other things. So that’s the area where you’re not entirely sure what the consequences will be.

And you know, we rely on China for a lot of goods in the manufacturing process, in the supply chain and also as a market. And so it is an inter interconnected world. And so it’s not as simple as some people may wish to believe. That said, we have seen the US trying to become more self-reliant on critical tools for example, with the CHIPS act and the IRA that Biden put together and some debate whether that was inflationary or not.

But interestingly, we’ve heard rumours in the financial press that some of the large corporate leaders are gently asking potential President Trump to not repeal those. So those trends have been set in motion. And then they’ll take the time, it takes years or decades to build this infrastructure. And so it’s not clear yet, what kind of new tariffs will be put in place and how successful that’ll be.

JY: Yes. I guess we’ll have to wait and see what happens on the geopolitics front. Trump has promised a lot in regards to Ukraine, and so we’ll have to see what happens there. And just finally then Justin, I mean, are there any particular sectors which you would be more interested in today or would avoid as a result of this?

JS: As I mentioned at the beginning of the call, we have a low turnover. So we keep our companies for more than five years on average. And our top 10 weights, there are about 60% of the portfolio. We’ve had them for over 10 years. So we are believers in long-term trends. So while there maybe a little bit of volatility in the short term, I think last time in 2016 there was a bit of what they call the Trump bump, where some value companies had done well because there’s lower regulation, maybe around some of the clean energy or a debt stimulus or there is a you know the lower taxes that can help sometimes lower quality companies.

But over the long term, we still see similar trends, which are we want to grow GDP with a lower impact on resources. And so with a potentially aging population with the global climate questions and then reshoring questions. And so what we’re trying to do is do more with less or do more, more efficiently. And so these are when we can find companies, like Eli Lilly, they are helping solve the the obesity pandemic in the US where 40% of the population, adult population, is obese or overweight. And they’re helping patients lose over 20% of their body weight which helps with morbidities, which helps with the you know, skeletal issues. It has a whole lot of positive impacts on the patient and on society. So that is doing more with less one example.

Or lot of our tech companies and companies are not called tech, but are in other areas of industrials or healthcare or consumer are finding solutions to do more with less, whether it’s you know, Avery Deon’s, RFID tags to track labels when you’re shopping. And so you don’t need somebody to help you check out, you can check out yourself or whether it’s Oracle’s AI cloud and SaaS products that are helping companies do more with less and find value in their data and maybe potentially lower the healthcare spend, for example, in the US. These are interesting long-term trends that we are attracted by, and they are by their nature, if they are mission critical and if they are helping solve a high level long term structural issue, then they are they are more protected from from short term trends because they’re necessary and they’re important for the long term. So that’s what we look for in companies.

And so we’re not gonna change the portfolio very much in the short term. We’ll keep our eyes open if there’s opportunities, if there’s some volatility which volatility is always a potential factor. But we believe if you have the best companies, if you have the strongest companies you can find, those will be the companies that actually benefit from volatility. So that’s what we’ll be looking for.

JY: Yeah, that makes sense. Well, thank you very much for joining us today, Justin, really, really appreciate your insights.

JS: Thank you, James. Have a good one.

JY: And there you have it listeners. So that’s our initial take on the US election. It does seem as if Trump is gonna win and actually win the popular vote, which is something he didn’t manage to do in 2016. So thank you very much for listening.

SW: Comgest Growth America is an unconstrained, highly concentrated portfolio of between 25-35 companies. This quality growth strategy endeavours to find the highest-quality companies that meet their stringent ESG criteria across the US. To learn more about the Comgest Growth America fund please visit fundcalibre.com