Trump’s victory of the US president election has shocked the financial market. As the surprise subsides, investors are now looking for clues of investment opportunities in his policy proposals. We expect the banking and insurance sectors to see benefits. On the other hand, as the probability of further Fed rate hikes is also growing, we are also expecting a negative effect on high-yield equities and real-estate sectors.

Winners and Losers

During his election campaign, Trump has repeated pledged that the government should raise $1 trillion to invest in infrastructure for the next 10 years. His economic advisor was also working on a plan to set up an “Infrastructure Bank” for financing large-scale infrastructure projects in the future. We believe his expansionary fiscal policy will be effective in stimulating the US economy. It will accelerate the pace of Fed rate hike, as reflected in all the economic indicators, for example, the US 10-year bond yield has risen sharply from 1.6% to 2.3%, and the US dollar index has now reached 100. The expected rate hike will also push the bank lending interest rates upward and improve Net Interest Margin. As the US economy gains speed, we also expect borrowers’ ability to repay to improve, and the burden of bad debts on banks to be reduced, which is good for the profitability of banks. In addition, as insurance companies invest mainly in bonds for stable incomes, it is expected that rising interest rates will enhance their profits.

On the flip side, Fed rate hike would affect the performance of interest-sensitive stocks, including high-yield equities and real-estate stocks. If investors would like to buy stocks in this sector, they should use the difference between the Fed rate and the yields of high-yield equities as an indicator for valuation. The historical average of this is around 3%. For example, if the Fed rate is expected to rise to 2%, the yields of high-yield equities should be 5% at least.

Pressure on Aviation and Real Estate Stocks

The currency outflow from China is going to worsen after Fed rate hike, and the pressure on the yuan will increase. Over the past few years, many Chinese enterprises has issued foreign currency bonds to expand their business, taking advantage of the strong RMB. Now, as the tide turns, these enterprises may find it more difficult to repay their foreign debts. Those enterprises with high external debts and relying only on RMB incomes, like aviation and real estate companies, are probably hit the hardest.

Trump Protectionism: Much ado about nothing

Market puts is deeply concerned by Trump’s protectionism. After the election, Trump has stated that he would have US leaving the Trans-Pacific Partnership (TPP) within 100 days of his presidency. He also said he would reopen the negotiations on the North American Free Trade Area. Throughout his campaign, he has repeatedly threatened to raise tariffs on goods from China to 45%, a clear writing on the wall that almost all his policies would be unfavorable to the development of international trade.

However, we believe that US is not likely to raise the tariffs on imports from China. It is because the US economy is dominated by the service sector and many of the goods sold are manufactured in China or other countries. In 2015, imports from China was at 466.8 billion US dollars, being 20% of the total, as China is one of the largest trading partners of the United States. At present, the United States does not seem to have enough manufacturing capacity, skilled workers and industrial technology to revive its manufacturing industry. The wages of US workers is also much higher than that of China. The reindustrialization of America would result in higher inflation rate, which would hurt US consumers. In addition, even though the Republicans control both the House and Senate, it is internally divided. If Trump wants to push radical policies in the future, it may be difficult to get them passed by the Congress. Therefore, we expect Trump’s trade protectionism would not have much impacts and investors should take up quality export stocks when the prices are low.

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