Has the “Trump bump” hit a speed hump? The S&P 500 has had a record breaking run, but it seems the surge of investor optimism following the US president’s pledge to make America great again is losing momentum.
Trump may have celebrated his first big legislative victory, with Congress repealing Obamacare, but getting reforms through the House of Representatives is a walk in the park compared to the finely-balanced Senate, where the bill still faces an uncertain future.
The Democrats’ denunciation of Trumpcare as a billionaire’s tax cut disguised as a healthcare bill has some truth to it. Trump’s big push on healthcare reform is ultimately aimed at freeing up funds to finance corporate tax reform. Out of his three big promises of infrastructure spend, cutting red tape and slashing corporate taxes, it is the latter in which the most market optimism is invested.
A telling measure of just how much investors have pinned their hopes on corporate tax cuts is the Goldman Sachs Group index of 50 US stocks that pay high tax rates (ie those companies which would disproportionately benefit from any Trump tax cuts).
The index, which includes companies ranging from luxury retailer Nordstrom to mining company Freeport-McMoRan, enjoyed a dramatic rise between election day and the end of 2016. But since the turn of the year, these companies have collectively given back most of their post-election gains.
Value stocks were in the vanguard of the so-called Trump trade, as investors anticipated that his proposed policies would boost struggling sectors like mining, energy, infrastructure and industrials. But investor flirtation with the value areas of the markets seems to have been just that — an intense and shortlived fling.
Rather than looking for reincarnated growth under Trump, investors are looking for guaranteed growth that they can love for longer. Here, tech stocks lead the pack.
Lift the lid on the S&P 500 and, beyond the healthcare companies enjoying a short-term boost from Congress’s decision, the top-performing companies this year sit firmly within the tech sector. The so-called FANGs — that’s Facebook, Amazon, Netflix and Google (or Alphabet) — are up between 20 and 30 per cent since the start of the year. They’ve just enjoyed a bullish results season, beating expectations both in terms of revenue and earnings.
Even the world’s greatest investor, Warren Buffett has admitted to dropping the ball when it came to pouncing on opportunities in tech stocks. For most of his career, the Sage of Omaha has avoided technology companies as these fall outside of his traditional area of expertise. However, at last week’s annual Berkshire Hathaway shareholder meeting Buffett issued a mea culpa for being too late to spot their potential.
Buffett may have missed the boat, but a number of UK fund managers have long cottoned on to the potential of tech. James Anderson, co-manager of the Scottish Mortgage Trust, has backed some of the most successful US tech giants including Amazon and Facebook plus China’s Alibaba and Tencent.
The investment trust tends to invest for the long term in companies that often start out in the private sector, working in areas such as artificial intelligence, driverless cars and robotics. It is also spending more time nurturing and challenging companies as a long-term stockholder, keeping faith with names like Tesla.
Likewise, James Thomson of the Rathbone Global Opportunities Fund, a global stockpicking fund, has a heavy weighting in technology stocks which make up almost a quarter of the fund. He holds names like Amazon and Facebook among his top ten holdings. He says he doesn’t hold Tesla, given its record of delays, manufacturing mishaps and competitive threats as “every automaker in the world is throwing all of their R&D at this”.
He does hold Infineon Technologies, which makes the chips which go into electric cars. He also holds names like PayPal and Activision (the second best performer on the S&P 500 year to date), which is the world’s largest video games company, delivering a string of the industry’s biggest hits such as Call of Duty and Candy Crush.
Of course, tech isn’t without its concerns. It is a very economically-sensitive sector and vulnerable to a slowdown in the economy. The risk of obsolescence and failure is high (anybody remember MySpace?). Then there’s the looming threat of regulation as companies like Facebook — which now has nearly 2bn members — become less social media networking sites and more like media companies providing the platform for content. In this instance, Trump and a Republican-dominated Congress could be quite helpful for tech investors as they don’t believe in government over-reach. On the flip side, the US president’s protectionist rhetoric is clearly a bear point.
In technology, as much as in any other sector, diversification is important. It enables an investor to embrace inevitable disappointments while maintaining an exposure to tomorrow’s winners.
Nasdaq’s dramatic rise may have some investors fretting about a tech bubble reminiscent of the late 1990s. But the index is much more diversified across sectors than it was back then. And while tech stocks still make up almost half of the index, these are very different beasts from the companies that led the pack during the dotcom euphoria. Companies are, in the main, no longer going public to cash in on investors’ insatiable appetite for anything tech.
Granted, companies such as Snap and Purplebricks still raise the spectre of irrational exuberance, while talk about the growth potential offered by robotics, artificial intelligence and driverless cars provides plenty of scope to rate companies partly on the basis of future leaps forward. But unlike in 1999, today’s listed tech companies today have increasing revenues and profits and proven business models. Valuations, while high, are often not all that much higher than the broader US market.
As Trump’s rhetoric starts to stumble and the market realises that his reforms are more easily promised than delivered, the Trump bump may turn into the Trump slump. Either way, investors are turning their attention to those areas of the market offering reliable and sustainable growth. And the tech sector has shown it can offer rising earnings, regardless of who is in the Oval Office.
Maike Currie is an Investment director at Fidelity International. The views expressed are personal. Twitter: @MaikeCurrie
Get alerts on Investing under Trump when a new story is published