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Challenging the consensus on Trumpeconomics

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Image courtesy trumpenomics.com.

Challenging the consensus on Trumpenomics

More than a half a year has passed since financial markets were shocked at Donald Trump’s US election victory, but some recent trends have developed that challenge some of the earlier opinions formed by financial market commentators about potential implications of Trump’s election.

Some of these earlier thoughts were repeated so often that we could easily mistakenly believe the level of supposed certainty surrounding the future course of ‘Trumpenomics.’ Investors may be better served by focusing on the uncertainty, which at times has been downplayed by markets. This sounds like a negative stance, but with uncertainty comes opportunities, and they may not always appear in the likely destinations and sectors you read about.

What were the popular financial predictions from Trump’s victory?

Some popular predictions for 2017 that emanated from Trump’s victory included:

  • The reflation trade will continue to see US stocks outperform, accompanied with a trend of higher treasury yields amidst plenty of volatility.
  • Emerging markets were also widely tipped to underperform on the back of concerns over the global trade implications from the Trump presidency.

Yet over the first four months of 2017, the opposite has occurred.

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Emerging market equities have been significant out-performers this year despite plenty of publicity surrounding the positive trend of the US share market. Most emerging markets came from a starting point this year of significantly cheaper valuations, treasury yields have been remarkably stable thus far in 2017, and four months in were lower than where they began the year.

The VIX index, a popular measure of volatility of the US share market, has also surprised nearly every pundit, hitting record lows and signalling a calm state of markets.

What signals is the financial market giving us?

Whilst financial markets can often give us false signals, it is worth at least investigating what they may be telling us and why perhaps the initial thinking on the Trump effects may not be so certain. The expectations were instantly high that Trump can cut taxes and free up regulations. With how much success this can be achieved is still debatable, but what is perhaps less debatable is that markets have set a high pass mark for what they are hoping for.

Rather than hoping for success here, are we seeing signs that investors are searching for other investment destinations that perhaps already exhibit a lower tax environment and less red tape? Are investors now questioning the consensus that any instability in global trade policies is a major negative for emerging markets, and pondering who is really the biggest loser under any potential trade war?

If we place faith in Trump delivering on the plan to cut corporate taxes, can we be sure this is the panacea some supporters would have us believe? Whilst on the surface US corporate taxes may appear high, corporations have shown they are quite capable of getting their effective corporate tax rate paid down to lower levels. It is also questionable as to whether the economy as a whole stands to benefit. During the 1950s and 60s, the US enjoyed relatively prosperous times amid much higher effective corporate tax rates. Tax cuts may place pressure on budget deficits, and a subsequent boost in economic growth is by no means assured. The US is already experiencing growing wealth inequality and there is still much guesswork over where the future tax landscape settles.

US bond yields as a positive sign

One shining light from this backdrop is the relatively benign environment this year for US bond yields. This is such a crucial market for funding levels globally, and ironically it could be that mild disappointments with Trump being able to administer his policies could prolong relatively easier monetary conditions going forward. This may be an environment that favours yield sensitive sectors such as commercial property, and better still if one can seek out relative value in other cheaper global markets with solid growth prospects.

Proposed infrastructure spending

Another dimension associated with the Trump reflation trade was the perceived kicker that could stem from significant boosts to proposed infrastructure spending. This also seems to be a case of investors fixated on Trumpenomics and perhaps not challenging the consensus and considering other opportunities. Whilst the infrastructure plan may sound impressive in numbers, if one looks at what China propose over the next few years, it suddenly becomes at best quite underwhelming. At the same time, on many various accepted valuation measures we find the US share market is priced extremely high when compared to the Chinese market.

If we keep accepting the various consensus predictions surrounding what the Trump win means for investors, we may find ourselves neglecting other opportunities.

Even with many sceptics regarding the Trump administration, funding markets are still operating smoothly for those business opportunities that are based on sound prospects. Varna Capital is certainly prepared to broaden its thinking beyond the consensus, and this has led to extensive experience in commercial finance across a wide range of sectors on a global scale.

Varna Capital provides developers and commercial property investors with market leading access to a broad range of financing options. We utilise strong capital partner relationships that include bank and non-bank alternatives from Australia and across the globe.

Get in touch with Varna Capital here.

Property beyond the headlines

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Property beyond the headlines

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US investor Howard Marks has helped build Oaktree Capital into one of the most successful alternative investment management firms out there today. Those who are familiar with him are privy to his concepts of first and second-level thinking, which he discusses in his regular memos to clients. In one such memo in September 2015 Marks states, “First-level thinkers see what’s on the surface, react to it simplistically, and buy or sell on the basis of their reactions.” In essence, first-level thinkers are easily swayed.

The media is notorious for highlighting extreme negative scenarios that are more likely to receive a larger number of clicks and therefore generate more advertising revenue. However if we let ourselves get swept away in this, we can very easily surrender to first-level thinking.

A quick look at some of the points we typically come across in the mainstream media surrounding the NSW property market is one such area where first-level thinking may be evident;

  • Rate cuts are coming to an end and the consumer is highly indebted, making housing severely unaffordable.
  • The increase in supply of apartments is a major risk that could lead to severe declines in property prices.
  • The crackdown on corruption and money laundering in China is making it more difficult for the Chinese to transfer money abroad, meaning the Chinese bid for Australian property going forward could be hit hard.

Re-visiting the concepts of Howard Marks and his thoughts on second-level thinking instead encourages investors to delve deeper prior to making any decisions. “On the other hand, second-level thinkers double-think (and triple-think) every angle of every situation.”

It may not provide great “clickbait”, but perhaps some areas that could lead to an upside surprise to economic growth forecasts in NSW should be examined if one wants to be a second-level thinker. A positive story that has recently received a surge in publicity is the potential boost to the NSW economy that infrastructure spending could provide. For many years, economists frustratingly pointed to this as an opportunity, yet the idea has been slow to gain traction. While the coalition formerly emphasised infrastructure as a priority through Mike Baird, the newly appointed premier Gladys Berejiklian vowing to ”go harder” with infrastructure shows some true signs of change.

Even before many projects get underway, NSW is currently the pick of the states in terms of economic growth. The numerous articles highlighting poor housing affordability typically discuss the future directions of house prices and interest rates. Less thought is given to real wages growth, probably because for many years this has been somewhat disappointing. If the NSW economy can continue its good form, is an improving real wages environment an example of second-level thinking that some investors may be ignoring? Potential for higher inflation and interest rates seem to be low for the time being. Whilst credit rating agencies have highlighted some concerns over NSW, borrowing spreads over government bonds are behaving themselves and suddenly an infrastructure led growth spurt looks quite plausible.

It becomes increasingly hard to argue against the warnings that there are risks in the property market due to an increasing supply of apartments. Yet is this getting too much publicity? Should we also extend beyond first-level thinking and consider the component of stand-alone dwellings which are yet to see the same trend of a large supply response?

It won’t take anyone long to find a plethora of articles connecting the risks for China’s crackdown on corruption and money laundering flowing through to a reduced demand for Australian property. What may take a little longer to find however are articles with in-depth discussions surrounding some of the reasons behind this crackdown. Are we then paying enough attention to the potential that a successful crackdown could result in longer-term benefits of a more efficient government in China, increased confidence, and an improving economy there?

This is not to suggest to run out tomorrow and gear yourselves up to the eyeballs on NSW property. The point is that whether we intend to or not, we often get caught up in first-level thinking. We should also be just as alert to look beyond very commonly expressed rosier forecasts on various asset markets. Negative themes that are currently lurking quietly in the background could develop into front-page news stories in the future, and should therefore also occupy some of our thoughts. Investors should examine all possible angles equally, not simply pay all of their attention to one scenario because it occupies more space in the media.