INSIGHTS

On November 28, 2016

AAM Viewpoints – An American Renaissance in the President Trump Era

Back in 2013 when we first discussed the American Renaissance theme in manufacturing, we wrote that every generation experiences a unique set of economic realities and corresponding investment opportunities. Donald Trump’s presidential election victory was the culmination of an electorate demanding change, not just in the way we conduct politics, but in the very structure of our domestic economy. For the past century our economy has relied on the voracious consumption of the American consumer. In an ever globalizing world this massive demand for goods and services led to chronic trade deficits and a reallocation of capital to regions of the world that were manufacturing the very things we consume. Countries like Japan, Germany, and China became the largest exporters to our shores.

Some economists have characterized the Trump election as a populist call to unleash “animal spirits” in the domestic economy, to reinvigorate economic growth, which has been anemic since the 2008 financial crisis, and to refocus regulatory, trade and tax policies in an effort to boost domestic manufacturing and production. The new policies, if implemented in any form, reinforce three pillars of potential growth:

1. A resurgence of domestic manufacturing, reversing a 40-year trend toward off-shoring to regions with lower labor costs. In fact, from 1985 through 2011, U.S. manufacturing labor costs have actually declined by about 60% versus other developed OECD (Organization for Economic Co-operation and Development) countries. The U.S. manufacturing sector is well positioned not only because of rising labor costs in traditionally low cost countries like China, but because technological advances have changed the way we design, manufacture, and deliver goods and services.


2. A highly attractive demographic of young Millennial workers entering our workforce. This demographic has the potential to not only be a source of competitive labor, but also provide demand for new housing, autos and services.


3. U.S. energy independence, which is now a reality. The United States now produces enough oil and gas domestically to cover all of its energy needs. The abundance of low energy and the infrastructure to support energy independence has the potential to drive more consistent returns on capital among our leading industrial and manufacturing companies for decades to come.

So far the market has been voting for many of the promises of the Trump campaign: smaller government, less regulation, and lower taxes. These policies are usually a recipe for higher stock prices. Trump is a much different personality than Ronald Reagan, but many of his policies echo those enshrined by Reagan in the 1980s. Both share the belief in the Laffer Curve – that by cutting taxes, GDP (Gross Domestic Product) will grow faster. We will see if the new administration will usher in a new period of growth and prosperity similar to the Reagan years.

On the industrial side, we at C.J. Lawrence like companies that either manufacture in the United States or are suppliers to global manufacturers of machinery and parts. Many of these companies trace their histories back a century or more but have survived and retooled over the years to, in some cases, be the single source global producer of a machine or part. These companies can be found in the aerospace sector but also in manufacturers of diagnostic equipment for the healthcare sector for example. We also like industrial and defense companies that apply advanced software design and 3D-printing technologies to streamline operations and reduce costs in research and development.

In the transportation sector, we like companies that move industrial materials from the middle of the country to the manufacturing centers around the country. These include rails, shippers, and trucking related companies. Within the energy sector, we focus on domestic producers of energy who have large oil and gas reserves in the three large shale regions. We include energy services companies that provide the drilling technologies and infrastructure needed to sustain high rates of production at our domestic energy producers. Among power generators, we like companies that are direct beneficiaries of low cost energy in their respective regions.

In the materials sector, we focus on companies that produce specialty chemicals, such as ethylene, which is used to produce polymers found in plastics, but also domestic steel producers that are increasingly the domestic source for large scale manufacturing and infrastructure projects. We also like producers of aggregates, like cement, who are the beneficiaries of domestic spending on infrastructure including roads and bridges.

We also see opportunities in consumer discretionary stocks. These are highly specialized retailers that are exposed to positive regional population trends supporting housing, automotive and manufacturing growth. Lastly, we find regional banks an attractive way to invest in the growth of a large deposit base in the manufacturing and energy states. In addition to benefiting from higher loan growth and improved credit quality in the energy and industrial segments, these businesses are the primary beneficiaries of a steepening yield curve which delivers improved net interest margins.

The recent election and policy proposals articulated by the incoming administration and new Congress have deepened our conviction that investors should consider having meaningful exposure to companies best positioned to benefit from a resurgence in domestic manufacturing. Of course, with all policy related strategies, the path is often not straight, and the timing is less certain. But, we believe the backdrop for the American Renaissance theme remains positive regardless of the pace and potency of new legislation.

We continue to monitor the macro-economic environment for evidence of headwinds, and closely watch movements in interest rates, global currencies, inflation, employment, and the pace of economic growth. After a prolonged period of historically low interest rates, and no/slow economic growth, the U.S economy looks to have regained its footing and economic trends are mostly constructive. Interest rates have risen substantially off July lows, which may be foreshadowing of higher GDP growth and inflation, but may also be confirming a long overdue normalization of rates based on a U.S. economy near full employment. We are also monitoring the trade-weighted U.S. dollar, which has been rising steadily and could potentially become a headwind for U.S. exporters. As Europe continues to recover, and China’s economic soft-landing becomes more evident, we expect the bulk of the major currency realignments, experienced during the past few years, to fade. We are also watching the discussion surrounding global trade deals very closely, given markets tend not to like trade wars. The post-World War II economic order was built on the concept of free trade and large multi-lateral trade agreements and treaties, but in the wake of Brexit and now the election of President-Elect Trump, a focus on free trade based on unilateralism will certainly challenge the status quo.

CRN: 2016-1107-5622R

Opinions in this piece are those of C.J. Lawrence LLC and are not necessarily that of AAM.

This commentary is provided for informational purposes only. It is not an offer or solicitation of an offer to buy or sell any product or service. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com.