Quite often, “Trends can be Friends”. The current investing and political environments have presented several opportunities that we see as having a beneficial medium-term upside for investors.
Today, investors find themselves in a market noted for high valuations and challenging earnings growth. With that said, we see several industry trends that appear to be supported both directly and indirectly by Trump administration policy goals: Financial services, Aerospace, Energy, Cybersecurity, and Robotics.
Financial Services: The financial services industry has enjoyed a strong trend, even prior to the election of Donald Trump. Beginning in June 2016, investor consensus focused on the Federal Reserve’s intent to increase its Fed Funds Target Rate. Viewed as the “Risk Free Rate”, nearly all U.S. bonds and loans, in some direct or indirect way, are priced-off that rate. Consequently, as the Federal Reserve raises its rates, banks will lend at higher rates, which is likely to translate into higher earnings.
Reduced regulation may also help financial company earnings. The Trump administration has stated its intention to roll-back certain regulations deemed too burdensome on financial services firms. For perspective, the Glass-Stegall Act of 1933, which separated commercial banking from investment banking, was 37 pages; the 2010 Dodd-Frank Act is 2,300 with an additional 22,000 pages of rules. With over 24,000 pages to choose from, one would think there are some regulations that don’t make sense!
If the administration is successful, the savings could be substantial. In 2014, the Wall Street Journal cited a study by Federal Financial Analytics Inc. indicating that “between the end of 2007 to year-end 2013, regulatory costs for Bank of America, Citigroup, Goldman Sachs JP Morgan, Morgan Stanley, and Wells Fargo increased 100% or $35.5 billion”. Between rising rates and deregulation, a trend in rising bank earnings may be at hand. Investors can gain passive exposure to this trend through both the Financial Services (symbol: IYG) and the Region Bank (symbol: KRE) exchange-traded funds
Aerospace/Defense: The Trump administration is looking to increase military spending by $54 billion! Trumps focus on the military and ancillary infrastructure spending is likely to be a strong tailwind to this industry.
Energy: Trump’s appointments to Secretary of State, Energy Secretary and Secretary of the Interior are all supporters of the U.S. energy industry. It is widely expected that regulations and limitations on energy development will be curtailed leading to greater profits for energy companies. The administration’s economic growth plans, if successful, would likely increase the demand for energy, as economic growth and energy consumption are higher correlated.
Cybersecurity: Cybersecurity experts say that there are two types of people in the world: those that have been hacked, and those that don’t know it. One need not run for U.S. President to be a victim of hacking. Increasingly, people in all walks of life are susceptible to cyber-theft. Whether you trade stocks, conduct online banking, or even shop at your local Wal-Mart or Target—you are at risk and you shouldn’t expect the threat to go away anytime soon. Cybersecurity is becoming a “must have” not a “nice to have.”
The cybersecurity industry is growing rapidly. According to Wired Magazine, the cybersecurity industry in 2004 had revenue of $3.5 billion and in 2017 it is expected to be $122.5 billion, or 35x higher. Cybersecurity Ventures estimates that cybersecurity spending will cumulatively reach $1 trillion between 2017 through 2021, implying a 12-15% annual market growth rate during that period. In his last year in office, President Obama’s 2017 fiscal year budget provided for $19 billion in spending on cybersecurity, an increase of $5 billion over the prior fiscal year.
Robotics: Do you enjoy ordering from Amazon? Then thank a robot for picking and packing your order. The Seattle Times reported last December 2016 that the giant online retailer uses 45,000 robots across 20 fulfillment centers; an increase of 50% over the prior year. Amazon is not alone. As noted by GaveKal, a global investment research firm, increasingly companies are “re-shoring” to the U.S. due to the relatively lower cost of robotic labor compared to low-wage countries. This is a seismic shift. In addition to lower cost, the U.S. is logistically important as it dramatically lowers, or in some cases eliminates global shipping costs. The Trump administration is expected to continue its push to bring companies back to the U.S. One way to ease manufacturing costs is to increase the use of multi-function robots to lower labor costs.
As with most high growth sectors, valuations and entry pricing are important considerations. We encourage investors to have a reasonable investment time horizon when investing thematically; some trends take longer than others to fully develop.