Trump, Trump and more Trump. In our November investment report, we stated that “we expect a relief rally in equity markets as we pass through the US election and a reasonably positive end to this calendar year”.
The election of Donald Trump as the United States 47th President has done more than encourage our projected relief rally – it has positively lit a fire under markets and no more so than in the US where the Dow Jones and Nasdaq both strongly rallied during November, gaining 7.5% and 6.2% respectively.
And in Australia, despite the timing for the first easing of interest rates being pushed further back into 2025, our ASX 200 gained an impressive 3.4%, which, excluding Materials and Energy, saw gains made across all other sectors.
President Elect Trumps promise of reduced corporate and personal taxes, along with a reduction in development regulations, lower energy prices and higher tariffs to protect US industry have been an early Christmas present for the US markets.
So much so that it has been the catalyst for strong performances across the majority of the global indices (including Australia’s) and it’s fair to say bourses are continuing to exhibit the true measures of a bull market – bad news is ignored and good news is magnified.
Hopefully this will continue, although for the US in particular some of the unfortunate consequences of the Presidents Elect’s policies could be an increase in inflation leading to interest rates being kept at elevated levels across that economy for much longer than expected.
But for now, across the United States a season of change is about to transform its economic landscape and for US and global markets it’s going to be a wild ride, particularly over the next 12 months.
How best to gain from the impending Trump tornado
The investment media has been flooded with research reports analysing the potential consequences of the Trump election for Australian companies. Whilst much of this will remain conjectural – at least for the next few months – there is little doubt that if Trump succeeds in implementing even 50% of his major policies the US economy and indeed the US as a society will be much different to what it is now.
As discussed above this will bring economic challenges for the United States and indeed Australia:
- US Inflation is very likely to increase meaning the reduction in US interest rates will be much slower than expected and could even tick up slightly,
- the US dollar will be volatile but biased to the upside meaning potentially weaker commodity prices which is negative for our economy,
- Economic pressure on China would mean lower commodity demand from that country but could also mean cheaper goods for Australian Consumers,
- Rising bond prices as a consequence of the likely increasing US debt which needs to be funded,
- The US pharmaceutical and processed food sectors will come under significant pressure to better improve health outcomes for Americans, and
- Potential US trade wars with China, Canada and the EU which could open up opportunities for Australian companies
We have prepared a list of Australian companies that we think will benefit from the looming Trump tornado as we do believe that commencing in early 2025, the United States will enter a period of very significant economic growth – which whilst it may not be quite a China 2.0 it could still be well on the way to being characterised as being very similar.
As an initial top-down analysis of this potential positive effect on Australian companies, Chart 2 shows the ASX sectorial performance – as well as the Dow Jones and NASDAQ – since the election of Trump.
As a starting point in determining the potential major beneficiaries, these will likely be sectors and companies that have a strong sensitivity to a stronger US economy with a preference for those companies with direct US earnings.
As can be seen from Chart 2 the early big winners – albeit it has only been one month – are the Financial and Consumer Discretionary sectors.
Drilling down into stock specifics the following are our sectors and key stock picks to benefit most from a resurgent United States in 2025.
Building products
James Hardie (JHX), Brickworks (BKW) Reece (REH), Reliance Worldwide (RWC) and BlueScope Steel (BSL) are all well positioned to benefit from a likely uptick in general construction but also housing starts through the United States over the course of 2025.
James Hardie and Brickworks have significant US based building products manufacturing facilities (cladding and bricks) and their products should see increasing demand and some pricing power.
Reece and Reliance will also benefit from the construction market but also an expected boost in home renovations.
Bluescope Steel has significant US steel manufacturing operations so should benefit from the proposed increase in tariffs on Chinese imports – which include steel products.
However, one of the risks to Bluescope is that it’s other global markets, including Australia, could be negatively affected if the Chinese increase their steel dumping product into these markets at below cost.
Chart 3 shows the effect Trumps first term (2016-2020) had on Chinese steel exports.
Consumer discretionary spending
Tax cuts and a growing economy will mean more discretionary spending funds available to Americans. And what better way to spend this additional money then by gambling more and purchasing additional consumer goods?
Aristocrat Leisure (ALL) and Light and Wonder (LNW) are two Australian listed companies that provide state of the art terminals and games for the wagering industry and we expect demand for their products to continue to grow.
Aristocrat has already taken off but Light and Wonder has equal potential and could show solid gains as the market grows more comfortable with its business outlook.
In terms of US consumers reaching into their pockets to buy goods, ZIP Money (ZIP) is ideally placed to benefit from this expected increase in discretionary spending dollars. Whilst ZIP was one of the best performing stocks on the ASX during 2024 we think it still has further appreciation potential as investors grow to better understand its key position within the US Buy Now Pay Later market.
Financials
The outlook for the US banks is very positive and this sector in the Dow Jones index has already made good gains since the election.
The Australian bank with the most direct exposure to the United States is Macquarie Bank (MQG) through its Infrastructure and Energy trading arms. This bank has shown over many years a strong ability to benefit from deal making in resurgent economies and is well placed to show this again during 2025.
Technology
Investing in technology stocks can often require a strong calming drink, as being growth stocks they are invariably on very high price multiples with little to no dividend stream or indeed even surety of near term earnings.
With that caveat, two Australian technology companies that are leaders across their respective fields and offer exposure to a sector that is being transformed daily through data gathering, storage and artificial intelligence are Wisetech (WTC) and Megaport (MP1).
Insurance
Insurance stocks do much better with higher bond yields as that provides a higher level of income for their supporting deposits.
As a consequence of insurance companies holding substantial investments in interest sensitive assets such as bonds and other market interest rate sensitive products, their investment earnings are especially sensitive to changes in interest rates.
In that regard, rising interest rates generally means higher income for insurance companies as they add higher yielding investments to their portfolios.
With the Trump policies expected to cause bond yields to rise slightly or at the very least remain relatively high over 2025 that will have a positive impact on earnings for our insurance companies.
Our favoured companies to benefit from the “Trump Factor” are QBE (QBE), IAG (IAG), Challenger (CGF) and Suncorp (SUN).
Industrial
Whilst our outlook for the oil sector over 2025 is benign at best, the United States plan to increase oil production will mean increased infrastructure expenditure. Worley (WOR) is an Australian company with high exposure to oil and gas infrastructure, construction and maintenance globally but also within the United States.
Orica (ORI) is a global provider of blasting technology and products with a high level of direct US operations. Its products could be expected to be in increasing demand as the US eases resource development restrictions.
Amcor (AMC) is a leading provider of packaging with manufacturing facilities within the United States. As consumer confidence rises and demand for goods increases the demand for packaging should be in lock step with this improving outlook. This should favour Amcor with increased earnings from the expected growth in sales.
The China Risk
Despite our positivity on certain stocks that stand to benefit from the Trump presidency, the broad policies telegraphed by Trump may have potentially serious consequences for Australia and none more so than through the effects they could have on our largest export market, China.
As background, China enjoys an annual merchandise trading surplus of around $US350 billion with the United States and close to $1 trillion globally. That trade surplus has been the key to China’s economic growth (also Australia’s) and a key reason for example why our iron ore producers have seen their exports to China grow so substantially over the past two decades.
However, China’s economy is maturing and economic growth has nearly halved over the past 10 years to around 5% annually (although some economists suspect the real growth rate has fallen to as low as 3%).
The $US1.4 trillion stimulus package announced by the Chinese Minister of Finance on 7 November has done little to date to fire up their economy and with the Trump tariffs on Chinese imports set to increase in January 2025 (with a strong possibility of a similar, if slightly muted action from the EU) the Chinese trade surplus and hence driver for the large majority of its past two decades of economic growth could start to falter.
President Xi of China has foreseen what the consequences of increased tariffs could mean and over the past few months has been on a charm offensive to establish better relationships with China’s major trading partners outside of the United States.
China’s industrial production has steadied but is struggling to gain momentum. This has included Australia where it has removed import restrictions on wine and certain agricultural and seafood products and re-established dialogue with our federal leaders.
Clearly this new found diplomacy is to make sure it has additional access to alternate markets for its exports which are expected be reduced into the United States into 2025.
It’s still too early to know how this will play out as the tariff war has yet to commence in earnest but if the Chinese are not able to divert exports to alternate markets then commodity demand, including iron ore, is likely to falter and the tough times our miners are currently experiencing could continue much longer than anyone would wish for.
An early test of sentiment for the iron ore market will occur during December. The period between December and February is when China usually replenishes its stockpiles of iron ore for the year ahead and indeed during that period iron ore prices usually show a solid price gain.
Chart 6 shows the performance of the iron ore price over the past 8 years between the lowest prices recorded in November to the price reached on 31 December.
As can be seen solid price gains were made across seven of those eight previous years with the median price gain over that period being 19%.
If similar gains can be made during December of this year, this would be a positive signal that the Chinese at the very least have some confidence for their economy leading into 2025.
And from an investor’s perspective this has obvious share trading possibilities over December for our major iron ore producers – BHP, RIO, Fortescue Mining and Mineral Resources.
Industrial commodities still struggling in price
Before we leave resources, whilst copper, aluminium and zinc and to a lesser extent thermal coal have seen price gains during 2024, these gains are quite insipid compared to what was projected at the commencement of 2024.
This has been disappointing given the supply constraints relative to demand projected for these commodities, as well as nickel leading into 2025 and onwards.
As Table 2 shows, all commodity prices are still very significantly off their respective highs that were seen during the most recent 2022 bull market in prices.
Energy stocks could be under continued pressure Energy prices have also been in the doldrums during 2024 and could be expected to continue into
2025 as a number of negatives are in play:
- Russia is producing at record volumes to pay for the Ukraine war, and
- Oil consumption has been reducing in China, and
- OPEC countries have not been cutting back production levels to provide price support, and
- The US is already the world’s largest oil producer (around 14.7% of the world market compared to Saudi Arabia at around 13.5%) and has plans to increase this by 3 million barrels per day, and
- Saudi Arabia is the lowest cost global producer at around $US10/barrel and therefore can easily flood the market to maintain income without a significant impact on margins.
With those issues potentially in play we think it is best to be cautious on the large energy players such as Woodside and Santos for the time being.
The share market – looking ahead
As we highlighted our November newsletter, the period from November through to February is often the best performing period for the Australian share market with potential average monthly gains (based on past performance) averaging around 1.5%.
With the excitement of the Trump presidency unlikely to abate until the economic consequences are better seen and understood, we are positive for further market gains for December and the first quarter of 2025.
Volatility will however still be front and centre particularly with the many geopolitical tensions Trump needs to confront and solve –and the sooner the better.
With an Australian federal election due in May, we may also see some profit taking late in the March 2025 quarter but as always smart stock selection will – over the medium to longer term – ride through this volatility and periods of market weakness.
In closing, have a very Merry Christmas and happy new year and as always please do not hesitate to contact your financial advisor to discuss any of the themes or stocks mentioned in this monthly letter. And we also always appreciate feedback so please let us know if you are finding the monthly letters of interest or would like to see changes made on how it is presented or topics discussed.