Hugo Rogers

A dispassionate look at 'Trumpflation'

Hugo Rogers

Trump’s election is an emotive topic, but as investors we must make dispassionate assessments. The President-elect will wield executive and legislative power that Barack Obama could only dream of, so the consequences of his victory will be profound. Over 50% of the Liontrust GF Global Water & Agriculture Fund is invested in the US, and an early appraisal suggests this exposure could benefit from a Trump administration.


Ahead of the election we had viewed the Fund’s US-centric, balanced, pro-cyclical positioning as appropriate, regardless of the outcome. While Clinton was a status quo candidate who was unlikely to shake the core pillars of the portfolio, we saw Trump’s unpalatable rhetoric giving way to a practicable reflationary core agenda, which should only serve to accelerate the structural trends that the portfolio is positioned to capture.


The Fund’s 50%+ weighting to the US is an expression of two distinct views, the first cyclical and the second structural. Firstly, we think that there is more top line and earnings growth momentum in the US than in any other region right now. We believe there is likely to be surprising strength in these fundamental factors into year end and the start of 2017. This opportunity spans a number of sectors including water and agriculture related equipment and infrastructure companies, appliance manufacturers and other consumer companies, and technology and service providers. Secondly, we are actively investing in solutions in supply constrained markets; companies that help to save water, companies that increase agricultural yields, and those that help protect scarce, environmentally important, resources. With high levels of research and development spending, and its entrepreneurial zeal, we think the US will remain the crucible of innovation for quite some time.


Perhaps just as importantly, the Fund has only limited exposure to emerging markets, which provides some protection if Trump’s counter-productive threats of a trade war come to fruition. We believe that this may prove to be an idle threat, but the protectionist noise may lead to volatility in the short-term, particularly as a rising dollar and firming rate expectations could force the liquidation of carry trade positions and lead to tightening local credit conditions in emerging markets.


Another key area the Fund avoids is utilities. We have been selling utilities steadily since February, using the cash released to fund our pro-cyclical purchases. This sector has been a huge beneficiary of falling rates and the scramble for yield over the last few years, and a popular refuge for cautious investors. However, now that rates are trending upwards, there is little valuation support and – unlike emerging markets – this is a de-rating which we see continuing for some time.


Trump may reverse some flagship US environmental policies, but the Fund has no exposure to areas most likely to be affected, including wind and solar for example. We have always stated that the prices of water and agricultural commodities are almost entirely driven by supply and demand, rather than the pricing of emissions credits or tax rebates. This should insulate the Fund from environmental policy risk.

Disclaimer:

• Past performance is not a guide to future performance. • Do remember that the value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.  • Investment in Funds managed by the Structural Opportunities Team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.



• The information and opinions provided should not be construed as advice for investment in any product or security mentioned.  • Always research your own investments and consult with a regulated investment adviser or licensed stock broker before investing.

  

Originally published on 22 November 2016.

Tuesday, February 14, 2017, 4:30 PM