• Goodman Group’s recent trading update was extremely upbeat, announcing higher levels of profitability and expectations for increased earnings. Read here

Don’t believe the Trump alarmists – the sky is not falling

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Don’t believe the Trump alarmists – the sky is not falling

In the wake of Donald Trump’s victory, I’ve been hearing a lot of Chicken Little-like fretting about what it means for stock markets and portfolios.  That’s fair enough because, to quote the legendary Sam Cooke, it looks like a massive change is gonna come.  So, as investors, how concerned should we be, and what should we be doing to preserve our wealth?

Well, if there’s one observation I can make to calm every investor, it is this: there’s a US election every four years.  There’s also an Australian federal election every three years and an Australian budget every year.

If that makes you feel better, you may just want to jump to the end of this article, where I suggest some stocks for consideration.  If not, then read on.

Despite the scheduled, and therefore predictable, frequency of elections, analysts and commentators pour over every detail – a Shaman invoking the spirit world seems an apt analogy – prognosticating about the implications for investors and imploring you to pay attention to this or that world-altering event.

In the almost-seventeen years since the turn of the century, the US has seen the final year of Bill Clinton, eight years of George W. Bush and almost eight years under Barack Obama.  And in all that time, the S&P500 has compounded at a rate of just 2.1% per annum.

Over the same period in Australia, a period in which the S&P/ASX200 has compounded at just 3.2% per annum, we have witnessed the last seven years of John Winston Howard as Prime Minister, followed by two and a half years of Kevin M. Rudd, three years of Julia Eileen Gillard, a further two months under Rudd, just under two years with Tony J. Abbot and just over a year now under Malcolm Bligh Turnbull.

With the Trump victory analysts are generally gravitating towards the conclusion that there will be broad US corporate tax cuts, stimulatory fiscal spending on infrastructure and a favourable disposition towards fossil fuels and banking.

But presidents and prime ministers come and go.  There are many, more important variables that will determine your returns and whether or not you preserve and grow your wealth.

It matters less who leads a nation for the next three or four years, than the quality of the economics of a business and the nature of its competitive advantage.  And we trust that the latter will endure for much longer than a presidential or prime ministerial term.  A good company is, by definition, a good company irrespective of who is leading the country in which it is based.

In terms of broader market influences that matter and looking back over the last thirty years, asset prices have experienced several significant tailwinds.  The most obvious has been declining interest rates.  Another has been the asset accumulating habits of the demographic avalanche that is the baby boomers.  And the final influence has been an increase in the proportion of economic output that is represented by corporate profits.  On all three counts there are rational arguments to suggest these tailwinds might end and there are even arguments to suggest that the trends reverse and become head winds.

No matter who you believe should be running the country, nor what you believe are the future prospects for interest rates, inflation or even economic growth, buying a somewhat diversified portfolio of the highest quality companies (CGF, VTG, CSL, REA, ISD and RHC come to mind) when available at a discount to intrinsic value should ensure your returns can’t be ‘Trumped’.

INVEST WITH MONTGOMERY

Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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6 Comments

  1. Elizabeth Kitchen
    :

    Thanks for your reminder of the need to focus on basics. Among those stocks mentioned, doesn’t CSL have an enormously high debt level, greater than shareholder equity? I would be nervous investing in such a high debt.

  2. Not sure where you’ve heard fretting about markets and portfolios. Markets seem to have taken the election of Trump like water off a duck’s back. I believe the fretting of hundreds of millions of people all over the world is for the very fabric of our existence. For those not fretting, maybe the penny will drop when a mushroom cloud appears on the Sydney horizon (if one is lucky…. or unlucky enough… to not be in the middle of it).

  3. the (start of?) sell-off in long bonds, while painful in the short-term, is actually a huge positive for the world:
    1. new investments will need to meet a “real” hurdle rate to secure the funds
    2. the pool of savings should grow – ie an increase in available capital for investment
    3. most importantly – less speculation (property / Emerging markets / FX etc etc) and (hopefully) an increased focus on investments that generate real returns ……

    it also means those companies (and governments) with very high debt levels will see less earnings due to higher funding costs, and (potentially) some pain in terms of valuation adjustments (which your radio piece spells out the delta to chgs in rates).

    we have had a 20-year bull market in bonds, arguably extened via central bank actions in the last 10 years …..as a result the “adjustment” may be painful – however – it may lead to more rational investment decisions by corporates and governments in future periods.

    rgds
    simon

  4. Lucas Hainsworth
    :

    Great piece, really agree with it.

    I know you are an equities guy so talking about the Bond market is maybe not on topic, but I’d be appreciative of any commentary as to whether people think it’s time to roll out of FI into equities. The 10 year has had a bump.

    • Just type bond or bonds into the search bar on the home page. we’ve written extensively about them here. You will also find our press articles on the subject in the “In The Press” section of the site.

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