Cox: Stock picking for a “Trump Victory Portfolio”

By Rob Cox
September 28, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

The U.S. presidential race is tight after the first debate between the two candidates and only six weeks until the election. That means it’s time to start thinking about a stock portfolio in the event Republican nominee Donald Trump defeats his Democratic opponent Hillary Clinton.

The Breakingviews “Trump Victory Portfolio” mimics a long-short equity hedge fund to position investors for such an event. The New York real-estate mogul’s positions have been hard to pin down and he has proven to be fickle on a variety of issues. As credit-rating agency Moody’s put it in June: “Quantifying Mr. Trump’s economic policies is complicated by their lack of specificity.”

Trump Victory Portfolio graphic: constituents view

 

Parsing speeches, unscripted remarks and the few papers he has produced on economic and financial matters nevertheless hints at how to trade a President Trump. The basic contours of his growth plan are: reducing regulations, or halting new ones, for industries ranging from energy to financial services; lowering individual and corporate tax rates; boosting infrastructure spending; and renegotiating trade deals. He also has pledged to deport as many as 11 million undocumented immigrants and further restrict foreigners from moving to the United States.

Finally, Trump has put forward an “America First” policy on the nation’s security alliances that could fundamentally increase geopolitical risk. To wit, Trump on Monday underscored his position that Japan, South Korea and Saudi Arabia should shoulder more of their own defense burdens. He also has said the North Atlantic Treaty Organization ought to be reconsidered.

Trump’s plan to cut corporate taxes – if he could negotiate one of his self-proclaimed great deals with Congress – would boost the bottom line of many U.S. companies. That’s especially true of smaller ones with largely domestic businesses that do not have the resources of a General Electric or Microsoft to minimize tax liabilities. That favors an overweight position in the Russell 2000 Index over the S&P 500 Index. And his “America First” theme argues against owning most overseas stocks.

Trump Victory Portfolio graphic: index view

 

Indeed, many big exporters and companies with manufacturing in countries Trump has fingered for possible tariffs or sanctions, including Mexico and China, could get whacked. Trump name-checked two of them: Ford Motor, appliance-maker Whirlpool and Carrier, the air-conditioner manufacturer that is part of United Technologies. Those stocks may make for good Trump-victory losers.

The reality-TV star also has personally threatened other companies. Amazon.com – whose founder Jeff Bezos owns the Washington Post, which called Trump “a unique threat to American democracy” – has “got a huge antitrust problem” and is “getting away with murder tax-wise,” he has said. In a tweet, Trump said “Don’t shop at Macy’s. Very disloyal,” after the department-store chain moved to phase out Trump-branded merchandise following his derogatory comments about Mexicans. He consistently refers to New York Times Co as “failing.”

It’s not clear whether, or how, Trump would retaliate against these declared corporate nemeses, but he will do them no favors. They are underweight in the Trump Victory Portfolio.

Similarly, Trump has joined Clinton in saying he would abolish the carried-interest tax deduction, which could ding the profitability of investment partnerships in the private-equity and hedge-fund industries. Many of these firms are now publicly traded, such as Ares Management, Blackstone, Carlyle and KKR.

On the flip side, the businesses of some Trump supporters may get an easier ride. That club includes Continental Resources, the $17 billion energy group controlled by Harold Hamm, and Vornado Realty, whose boss Steven Roth serves as an economic adviser to the candidate. So does steelmaker Nucor’s former chief executive, Dan DiMicco.

Though he has not specified how he would cut red tape, Trump has criticized the Dodd-Frank Act and praised Jeb Hensarling, the leader of the House Financial Services Committee, who wants to make life easier for small banks at the expense of big ones. A logical Trump trade, then, would be to buy the PowerShares KBW Regional Banking Portfolio ETF, with its holdings of shares like Bank of the Ozarks and Community Bank System, and to short Citigroup. Trump also has said he would remove barriers to drilling and hydraulic fracturing for oil and gas. The VanEck Vectors Unconventional Oil & Gas ETF might be a way to play that pledge.

Trump’s immigration and trade policies would create winners and losers, too. Deporting 5 percent of the workforce would push up wages, putting more money in the pockets of shoppers at Wal-Mart Stores and other retailers. It also would increase their own labor costs, while slapping tariffs on imports from China would make goods more expensive. Wal-Mart’s heavy reliance on Chinese suppliers puts it at risk under a Trump regime.

Building detention centers to corral deportees and erecting a 2,000 mile wall on the Mexican border would require plenty of building materials, like the kind made by Vulcan Materials and Martin Marietta. It also should help equipment makers like Caterpillar and Manitowoc, as well as construction companies such as KBR and Fluor. They also might get a lift from Trump’s promise to double the $250 billion in infrastructure spending Clinton advocates.

The forced exodus of immigrants would be bad news for Western Union, the biggest sender of financial remittances. On the bright side, shipping millions of people back to their native lands will require 50,000 flights and bus rides, the American Action Forum reckons. That’d be good for American Airlines and United Continental, with their extensive Latin American routes, and FirstGroup, the UK-listed company that owns Greyhound bus lines.

Similarly, Trump has cast himself as the rightful heir to Richard Nixon’s campaign for law and order. That presumably would benefit Corrections Corp of America, which owns, operates and manages prisons. Trump’s endorsement by the National Rifle Association also should be good for gunmakers like Smith & Wesson if he is elected.

Clinton has thus far garnered more support than Trump from the investment community, which has showered her campaign with donations. They know well enough, however, to hedge their bets.

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