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The Trump bump and is it sustainable?

Local and international Sharemarkets have been on a tear of late.  Ever since Donald J Trump was elected US president in the first week of November last year the world’s share markets (for the most part) have traded strongly higher.

In raw terms the US market is the best part of 14% up from the first week of November to this week 

The local Australian share market is up a slightly lower but still very impressive 12.7%.

This has come as welcome relief to share investors in Australia who have been experiencing a fairly lacklustre last couple of years as the remnants of the GFC have played out around the world and impacted heavily on the financial services and resources focused  local economy and share market


So why has the surge in share prices occurred and how sustainable is it?

Despite Mr Trump’s unconventional politics and the surprise result from the presidential poll of last year the investment market has welcomed his ascension to power.

The reason behind this is all to do with base economics; or more pointedly to major policies he has long advocated; 

  1. He has promised to cut US corporate taxes dramatically. 
  2. He has promised to instigate massive infrastructure spending.

These broad themes have excited share market investors who have considered the stimulatory effect of infrastructure spending on the economy and likewise the boost that lower taxes should have on the bottom line profits of major corporate’s. 

The US is in major need of infrastructure spending on everything from roads to airports to government buildings. This infrastructure investment will see major employment growth with higher paid wages in an economy that is tracking along strongly already and so would boost inflation that has been lacklustre for years.

Lower tax rates and a simpler tax regime (it is hoped) will likely stimulate investment spending by corporates and they retain more of their profits for reinvestment into their operations.

Many proponents are also speculating that a lower corporate tax regime in the US will result in the repatriations of literally hundreds of billions of dollars of cash earnings domiciled in other countries that will be sent back to the US based parent company for investment stateside.

So can Trump and the Republicans get these changes through Congress? 

This is the big unknown. 

Yes the Republicans have control of the Senate and House of Representatives but unlike in parliamentary democracies (like Australia) not all party members vote exactly the same way. 

This was brought into stark relief when the Republicans tried to overhaul and rescind the so-called Obamacare health reform put in place by the last administration. 

This roll back was an article of faith for Republicans for the past five years but when it came to the end point there was not enough votes to change the law and so the legislation was pulled for another day.  Many in Congress wanted stronger legislation than was proposed and so the back room politics continues on this issue. 

So this legislative setback has meant some are starting to question whether a lot of the major ticket items can be enacted in a timely fashion going forward. 

This has filtered through to a pause in the share market rise over recent weeks but the overall market is still holding around record levels.

So what about our market ?

In the Australian context what happens in the US markets has a big bearing on where our markets go as well. Sentiment in share markets is fundamental and where the leading offshore markets head catches most markets in its wake.

Intertwined with this has been specific dynamics relevant to the local economic fundamentals.

There has been a rekindling of the commodities price rise over recent quarters which has put more fire under the resources sector. 

The banks have come under some scrutiny on a regularly framework and this has caused some investors to become anxious about their share prices but on the whole they have held up relatively well over the last six months.

Also when we consider how concentrated the local Australian market is sentiment from offshore investors can have a big bearing.

The top 10 stocks locally are made up of the four big retail banks and an investment bank (ANZ, CBA, NAB, Westpac and Macquarie) one large resource company (BHP), two mega retailers (Woolies and Wesfarmers – that owns Coles), a telecommunication company (Telstra) and a heathcare stock (CSL).

So we are far more concentrated than other markets and when investors in general feel positive about shares they can drive the market higher by simply buying the top ten which they have been over recent months. 

So what does all of this mean for Hudson investors?

The road forward in the US is still somewhat opaque but the broad thrust of the new administration is very much pro-business and pro-economic stimulation.

Locally the resources sector is better, the banks are still healthy and on a fundamental basis the local share market is still some 13% below where we were almost 10 years ago at the height of the market before the GFC. 

All of this points to the share market being an attractive place to invest for growth and yield going forward.

Please discuss further your individual needs with your Hudson adviser.

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