David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with DavDeborah B
I'm going to spend time here addressing the one question I have been receiving frequently since Nov. 8, which is how we are investing around Donald Trump. And my answer in the immediate aftermath of the election was that we are not investing around Trumponomics and that answer hasn't changed six months later.
The response to this question in many circles has been met with incredulity and surprise since it is taken as a given that this new and different U.S. president is a major transformational event. But as Bob Farrell famously said in Rule #9 of his 10 Market Rules to Remember, "when all the experts and forecasts agree, something else is going to happen".
And as if with an exclamation mark on this topic, in a CNBC interview back on February 27th, Warren Buffett came right out and said "if you mix your politics with your investment decisions, you're making a big mistake."
And that has been and remains our investment philosophy — understanding that even the most effective presidents historically barely get half of what they campaigned on through the legislative branches. We are seeing that take place in real time because it is not clear just yet how Obamacare is going to be repealed and replaced, the House bill is highly likely not going to pass the sniff test in the less ideological Senate, nor do we know what tax reform will truly look like or how it ultimately gets paid for beyond fictional assumptions over "dynamic scoring."
Mr. Trump spent most of his campaign targeting China and ignoring Canada, and yet when he had the chance last month to label China a currency manipulator, he chose not to for geopolitical reasons, and instead has satisfied the protectionists within his ranks by targeting Canadian softwood lumber producers and dairy farmers (as an aside, the tariff actions will drain the grand total of 0.1 per cent from Canadian GDP growth, but it's more the optics).
It shouldn't be lost on anyone that it took Ronald Reagan five years to get tax reform through and inevitably he needed Democrat support in Congress — and in his first two years, we had a recession on our hands and a bear market in 1981 and 1982.
This by no means is to say we are anywhere close to having such a condition on our hands today as much as saying that when it comes to politics, what you see isn't always what you get, and what makes sense is to invest around themes that work no matter who occupies the Oval Office, or in this case, Mar-a-Lago.
In other words, to invest around themes that transcend the political landscape.
For example, what were the well-established, entrenched trends in place before Mr. Trump was elected?
Here are a few:
The bull market in the U.S. dollar was fully intact before and after, and this is something we can invest around — a strong dollar requires more of a domestic equity thematic in the United States while the mirror image (which is a soft Canadian dollar) would otherwise require more of an exporter theme here at home.
The Fed was raising rates before Mr. Trump was elected, has tightened policy twice since last November and is hinting at another move this June. This, in turn, provides the banks with wider net interest margins and an area we are willing to buy on dips.
The same holds true on oil, where this OPEC supply cut agreement was signed before the U.S. election, and while the price of crude has slipped in recent weeks for a variety of reasons, the extension of the agreement should provide support going forward and render the recent pullback a nice re-entry point.
Remember what happened last year — at one point early in 2016 the oil stocks were down 14 per cent but to have extrapolated that into the future instead of using it as a buying opportunity would have been a mistake because the sector finished all of last year with a 30-per-cent advance.
One of the most important developments, of course, is that economic activity through much of Europe and Asia really began to improve months before the U.S. election. This improvement in most cases has continued, especially in the EU, where the political clouds have parted and not just with Emmanuel Macron's victory in France but the prior elections in Austria and the Netherlands, where, thankfully, we are finding out that the Brexit and Trump victory, after all, was not a leading indicator of establishment parties across the globe faltering into oblivion.
And now we also see Angela Merkel and her CDU party winning some key German state elections of late and gaining ground in the polls, and there is growing chatter now out of Europe's largest economy that meaningful fiscal stimulus is coming sooner, rather than later (and likely before we see anything coming out of Washington).
So not only have the political clouds parted, but we have much greater cyclical tailwinds overseas, better liquidity conditions and more compelling valuations to consider.
And we also have to acknowledge that the Canadian equity market has a market cap of $2-trillion and the U.S. is $26-trillion, but there is some $40-trillion of market cap abroad that right now looks very appealing.
Avoiding home bias, and moving outside our comfort zone of being North American-centric, the case for making asset mix shifts towards better value overseas, and in parts of the world where the economic and market cycle are far less mature, valuations far more alluring, and earnings momentum more robust, is very strong at the current time.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.