President Trump is now a reality. However, we obviously remain in the early days of his actual term. At present, the vast majority of his cabinet picks have yet to be confirmed, many of whom do not share all of his views in lockstep, and Congress itself is far from united on many of the most highly publicized issues promoted by the Trump campaign. In our view, the policy path remains unclear.
In the past two months, the initial uncertainty following the election results was followed by a high degree of enthusiastic speculation, particularly in areas of the market perceived to be impacted by regulation such as energy and financials. At the same time, the rhetoric around trade policy depressed stock prices of global companies despite a lack of consensus on which actual trade policies would be implemented or changed. For example, the recent news regarding the Trans-Pacific Partnership (TPP) was largely expected and simply opens the door for new negotiations with trading partners, with uncertain conclusions at this point.
The so-called “Trump trade” does seem to have stalled and we believe that a reassessment of the rally is beginning to happen now that the reality of his term is upon us. Immediately post the election, it appeared that the markets had been focused on the perceived benefits of a Trump presidency, while only recently began to consider the potential negatives. In our view, the potential positives include reduced regulation, business-friendly policy changes, reduced taxes (including on repatriated cash) and the potential for fiscal stimulus. However, we believe these outcomes are far from certain and could be equally offset by the potential negatives of barriers to global trade, congressional inconsistency, and unstable white house policy.
This uncertainty is exacerbated by a precarious global economy, tense relationships among the United States, China and Russia, and other geopolitical fears. Given all of this, we believe that our longer view and focus on strength of fundamental characteristics of companies should ultimately benefit our clients and shareholders.
Impacts on Industry and Specific Jensen Companies
Healthcare companies could be impacted if the Affordable Care Act (ACA) is repealed, in part or in its entirety. Impact to specific companies is dependent on how/if the ACA is replaced. However, we foresee the potential for top-line headwinds should the change result in marketplace uncertainty. Importantly, we believe domestic weakness would be offset by continuing international strength as most of our healthcare holdings benefit from global sales footprints. Specific to the Fund’s position in UnitedHealth Group, a repeal of the ACA could disrupt the domestic health insurance market. In this scenario, we see a mixed bag for UnitedHealth as the company has very little exposure to the ACA-mandated healthcare exchanges, but does benefit from a growing presence in outsourced Medicaid programs.
Global industrials have a number of puts and takes in their businesses such that any negative impact on trade could be offset by increased government spending for fiscal stimulus within infrastructure and defense spending. Getting such stimulus moving may be challenging however, given the competing desires for stimulus and keeping debt in check.
Technology companies could be impacted by immigration policy, particularly by potential H-1B visa constraints. Within the Fund, Cognizant Technology Solutions is most acutely exposed to this risk. However, this issue is not new to us or the company. We hold a favorable view of Cognizant’s efforts to on-shore employees.
A number of our companies would likely benefit from a potential repatriation of foreign cash and this would allow them to have additional cash flow to invest for future growth across their businesses. This applies particularly to the Technology sector but also to companies such as Johnson & Johnson, Procter & Gamble, TJX Companies, MasterCard, Nike and Amphenol.
Consumer staples companies remain fundamentally sound and geographically diverse but as interest rates rise, the unwinding of the dividend yield trade could impact their stocks despite the strength in their businesses. We are monitoring this to see if it perhaps represents a buying opportunity given that these companies have been more expensive of late.
Global trade concerns could potentially harm prospects for companies such as UPS and Nike. However, Nike generates substantial revenues outside the US and UPS would likely not bear any tariff costs directly, which may mute the impact of trade restrictions somewhat as companies will still look for ways to pursue global customers.
Finally, we believe it is worth restating that much is still up in the air. It is important to remind ourselves that the President does not make law, and Congress, while under a one-party majority, will still need to make compromises even within the majority party in order to enact significant legislation. It is also true that rhetoric and reality can be very different, perhaps particularly as President Trump and some of the members of his cabinet have divergent views on many issues. Uncertainty and volatility are to be expected and traditionally those have been undercurrents that strong, fundamentally sound companies can take advantage of to produce solid business returns. We will be watching closely to say the least.
Fund holdings are subject to change and should not be considered recommendations to buy or sell any security. For a listing of the funds current holdings, please click here.