2017 has just started, with the market continuing to focus on Donald Trump’s presidency on 20 January. Investors are trying to look for clues from Trump’s manifesto and post-election public speeches to develop their future investment strategies. Will the US stock market and economy further advance after Trump takes his office?

Dow hits record highs after Trump was elected

The market had worried Trump’s radical speeches, protectionism and irrational diplomatic means would led to market volatility if he was elected as the President; however, the market has promptly digested the news and expected his tax cut and expansionary policies would stimulate the U.S. economic growth, triggering an pronounced uptrend of the U.S. stock market. The Dow Jones Industrial Average approaches 20000 points even with the interest hike by Fed in December last year, reaching historical high.

The rise of protectionism and the U.S. reindustrialization

Although the details of Trump’s future policies is yet to known, Trump reiterated the call for protectionism recently. He warned General Motors that the Company’s manufacturing base should be located within the United States instead of Mexico; otherwise, they would face high tariffs levied. The speech immediately caused GM’s major competitor Ford to cease its plan for setting up manufacturing base in Mexico.

The avocation of globalization and outbound investment of U.S. capital 20 years ago was mainly due to the land and labor costs advantages in emerging markets, helping the U.S. corporates to reduce their production costs. However, the economic takeoff of emerging markets in recent years boosted the land and labor costs. On the other hand, the economies of developed countries have not been consistently thriving due to globalization, with various European countries encountering economic difficulties, stimulating the penetration of socialism and protectionism. In fact, the avocation regarding to the reindustrialization of the United States has emerged since the Obama’s presidency, although no action has been taken yet. However, Trump’s warning to General Motors stimulate the expectation that the U.S. Government will utilize political means to stimulate the economy, attracting corporates to move overseas manufacturing bases back to the United States, thus improving the unemployment rate. We believe the reindustrialization of the United States will become the catalyst of the U.S. economy.

Yet, the avocation of reindustrialization is apparently contradictory with Fed’s interest rate policy. Reindustrialization will improve the employment of the country; yet, interest rate hike may strengthen the US dollar, which will inevitably affect the competitiveness of the country’s exports. We believe the U.S. Government has to stimulate local consumption to offset the slowdown in export in order to maintain a sustainable economic growth.

Relaxation of financial institution monitoring favors banks' profitability

In addition to reindustrialization, Trump promised to implement financial deregulation during his election campaign, bringing hopes to those banks which were fined repeatedly due to poor supervision. In addition, the Fed’s post-meeting statement stating that the U.S. interest rate may increase 2-3 times this year. We expect continued interest rate hike will improve the leading rates of banks, thereby improving their net interest margin and net interest income, supporting the performance of banking and financial related shares.

The U.S. stock market is expected to reach a new high due to economic recovery

We believe that manufacturing and financial industries would become the dual-engines of the US economy if Trump could fulfill his promises. The U.S. market is expected to be politically-driven in the future. With the appreciation of US dollar appealing capital inflow to US dollar assets, the U.S. stock market is expected to reach a new high, with the support from traditional industrial, infrastructure and financial industries.

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