When not arguing with celebrities, in the period since his victory over Hillary Clinton last November, Trump has been busy putting together his administration, while his economic policies have already been termed ‘Trumponomics’ (a nod to ‘Abenomics’ which was used to describe the economic policies of Japan’s prime minister Shinzo Abe when he was first elected).

Buoyed by hopes that his plans to cut taxes, push for deregulation and increased infrastructure spending (to the tune of $1trn over 10 years) will fuel US economic growth and inflation, global stock markets have risen rapidly in the time since Trump’s election. Indeed the S&P 500 Index of leading US company shares has surged 6%, while UK-based investors in US equity funds have also benefitted from the strengthening of the dollar versus sterling.

So on the day of the reality star’s inauguration, we look at the potential funds and sectors which could benefit from his tenure in the White House.

Active versus passive

The US stockmarket is perceived to be among the most efficient of all global markets, so most investors tend to adopt a passive approach. Namely there is greater use of index tracking funds versus actively managed funds.

Indeed since the onset of the global financial crisis, Tilney Bestinvest’s managing director, Jason Hollands, describes North America as a “graveyard of active fund management”. This is because very few funds have managed any consistent outperformance of the S&P 500, with 89% of funds underperforming over the last five years up until Trump was announced as President-elect.

Hollands says: “The S&P 500 Index has long been a notoriously tough index to beat but in the aftermath of the global financial crisis when the market has been supercharged by a tide of liquidity and the low cost of capital has fuelled share buybacks, the benefits of being cherry picked which companies to own has simply not paid off for the vast majority of funds.

“But we are moving into very different times and it may just be the case that more discerning approaches start to pay off. A traditional passive approach, which has worked so well during the multi-year bull market, and remains relevant for long-term buy-hold-and-forget investors may not prove to be the ‘no brainer’ bet we’ve all gotten used in the medium term, given the potentially very divergent fortunes for business and sectors ahead. And a possible wildcard outcome could be an improvement in the fortunes of US active fund managers after years in the wilderness.”

Small and mid caps

Whatever views investors have on Trump’s election win, there have long been grounds for optimism on the outlook for the US economy, with GDP growth at a steady 2%, a job market back close to full capacity and inflation ticking up.

While no-one yet has grasped the full implications of what Trump’s economic policies will mean, it has generally been observed small and mid cap companies will remain better insulated from volatility than the large caps thanks to the strength of the dollar, greater protectionism and fiscal policy.

Adrian Lowcock, investment director at Architas, says: “The speed and extent of the US rally following Trump’s election victory has caught many investors out. The mains areas which have benefitted the most have been US Financials, Energy and Industrial stocks.  But in particular the smaller and mid cap companies have led the way.

“This is not too surprising given that mid-sized and smaller companies tend to be more domestically-focused and the benefit of increased spending will have a much bigger impact on their bottom line, while the larger US companies are global behemoths whose income come from a more diverse range of sources.”

Investing in small caps has proved a successful strategy in the US over a long period of time. For example, over the last 25 years investing in US small caps would have delivered outperformance over the broader US market (as measured by the IA North America sector) on 18 occasions. Meanwhile since 2001, on a rolling five year basis, the IA North American Smaller Companies sector has never underperformed the broader peer group.

Sectors

At the sector level, Hollands notes that Trump’s victory has been well received by financials, energy companies and those businesses which may benefit from infrastructure investment. For example, engineering & construction companies and the railroads that will carry many of the heavy materials used in the upcoming construction projects.

“Looking forward the biggest issue for investors is how much expectation and hope is in the price,” says Lowcock. “US financials have risen nearly 20% since the election with regional banks having risen as much as 50% in some instances. Other sectors have put in a similar strong performance, transportation has risen 15.5%, while energy, industrials and material sectors have all posted strong double digit returns.”

In terms of where to avoid, Hollands says considerable risks persist for companies with high exposure to emerging market trade or supply chains “given continued share rattling towards China”.

“Trump’s unpredictability has the capacity to destabilise stocks and sectors,” he adds. “This was recently demonstrated by his comments that healthcare companies are ‘getting away with murder’ in what they charge for medicines, comments which spooked the share prices of biotech and pharma companies which had initially reacted positively to his election, seeing it as a respite from Clinton’s threat to implement greater price controls.”

Closer to home

Away from investing in US funds, are there any areas in the UK which could benefit from Trump’s administration?

“The UK sectors which could benefit are most likely to be the miners as increased infrastructure spending should be supportive of commodity prices,” notes Lowcock.  “Increased construction spending would also help boost some industrial stocks, energy companies and materials businesses. The issue is whether increased spending reaches companies in the UK and stock selection will be critical.”