Adam Klein
January 06, 2017
Adam Klein @ ARS Investment Partners, LLC
Business Development

Weighing the Prospects of Trump’s Policies against Political and Economic Realities


 


“Don’t forget about the huge difference between expecting something and experiencing it.”  Attributed to Angela Merkel 

In our Outlook (October 13th) published before the Presidential election, we described a world at an inflection point.  Monetary policy, which had succeeded in stabilizing economies and markets after the financial crisis, appeared to be reaching its limits. We wrote that “without proper fiscal policy, investors should expect more of the same low growth, low interest rates and low inflation … we have experienced for some time.”  The election result in the U.S. is being interpreted as a call for change, and some of the initiatives being proposed echo the policies that we have called for in this Outlook for years.  These include investing in U.S. infrastructure, making corporate tax policy globally competitive, repatriating cash held overseas by U.S . corporations and reducing the regulatory burden on businesses.  Importantly for investors, there is a renewed sense of confidence and optimism developing from U.S. businesses and consumers as the long-awaited fisca l policy initiatives appear to be on the way to complement the accommodative monetary policy stance of the Federal Reserve.  The outlook for corporate earnings (higher), inflation rates (slightly higher) and interest rates (trending higher, but continuing to be well below historical norms) remains supportive of equity investments. 


Continue reading attached PDF for full Outlook.   


Adam Klein

ARS Investment Partners, LLC

aklein@arsinvestmentpartners.com

646-736-0453

ARS Investment Partners, LLC • 500 Fifth Avenue • New York, NY 10110 • 212-687-9800 • arsinvestmentpartners.com © 2016 ARS Investment Partners, LLC. All Rights Reserved
1
December 27, 2016
Weighing the Prospects of Trump’s Policies
against Political and Economic Realities
“Don’t forget about the huge difference between expecting something and
experiencing it.”
Attributed to Angela Merkel
In our Outlook (October 13th
) published before the Presidential election, we
described a world at an inflection point. Monetary policy, which had
succeeded in stabilizing economies and markets after the financial crisis,
appeared to be reaching its limits. We wrote that “without proper fiscal policy,
investors should expect more of the same low growth, low interest rates and
low inflation ... we have experienced for some time.” The election result in
the U.S. is being interpreted as a call for change, and some of the initiatives
being proposed echo the policies that we have called for in this Outlook for
years. These include investing in U.S. infrastructure, making corporate tax
policy globally competitive, repatriating cash held overseas by U.S.
corporations and reducing the regulatory burden on businesses. Importantly
for investors, there is a renewed sense of confidence and optimism
developing from U.S. businesses and consumers as the long-awaited fiscal
policy initiatives appear to be on the way to complement the accommodative
monetary policy stance of the Federal Reserve. The outlook for corporate
earnings (higher), inflation rates (slightly higher) and interest rates (trending
higher, but continuing to be well below historical norms) remains supportive
of equity investments.
The current optimism for future policy changes should be balanced against
the market conditions present today. Whenever rapid changes occur in the
markets as we have seen in the post-election period, it often gives us pause
as the global economy needs time to adjust. We cannot help but notice that
markets are already giving significant credit for legislation that could take
many months to pass, and possibly then only after considerable debate and
compromise. Furthermore, the confirmation process for Cabinet positions
may be contentious and drawn out. Even as new laws are passed, they
often require several months for their benefits to flow through the economy.
While we are awaiting those benefits, what economic impact will rising
interest rates, and oil and gas prices have in the meantime? And what
impact will a sharply rising dollar have on developing economies whose
depreciating currencies make it more difficult for them to service their dollar-
denominated debts? We also wonder whether investors are postponing
making security sales until January in anticipation of lower tax rates in the
New Year?
In this issue of
THE OUTLOOK. . .
Assessing the
economic impact of
Trump’s policy
proposals
Fiscal initiatives to
complement monetary
policy
Reasons for cautious
optimism
Investment
Implications
Important firm update
There is a renewed
sense of optimism as
the long awaited fiscal
policy initiatives appear
to be on the way to
complement the
accommodative
monetary policy stance
of the Federal Reserve
December 27, 2016
December 27, 2016
ARS Investment Partners, LLC • 500 Fifth Avenue • New York, NY 10110 • 212-687-9800 • arsinvestmentpartners.com © 2016 ARS Investment Partners, LLC. All Rights Reserved
2
December 27, 2016
These are some of the questions we are asking as we witness a growing
chorus of optimists, many of whom were so cautious just six weeks ago.
In balancing the opportunities presented by the transition from an economy
supported primarily by monetary policy to one which also has added fiscal
policy initiatives, investors should consider an investment strategy with three
elements – owning quality growth companies, owning quality companies with
strong balance sheets and reasonable dividend growth prospects, and
owning opportunistic investments with specific catalysts. An added
challenge for market participants, many of whom were over-allocated to fixed
income, will involve the timing of getting back into the equity market given the
uncertainty as to the timing of policy implementation and anticipated market
volatility in 2017. Near-term uncertainties aside, equity investors with a
longer-term view should continue to be rewarded in the coming years as the
recovery continues.
The Handoff of Monetary Policy
to Fiscal Policy Likely to Begin in 2017
“The projections in this Economic Outlook offer the prospect that fiscal
initiatives could
catalyse
private economic activity and push the global
economy to the modestly higher growth rate of around 3.5% by 2018.
Durable exit from the low-growth trap depends on policy choices beyond
those of the monetary authorities – that is, of fiscal and structural, including
trade policies – as well as on concerted and effective implementation.”
“Escaping the Low-Growth Trap”, OECD, Economic Outlook No. 100,
10/28/16
The challenges in the world cannot be erased by one election as economic
headwinds such as excessive indebtedness, aging demographics,
underfunded pensions, excess capacity and declining productivity (not to
mention environmental) are structural in nature and will take years to
address. Of more immediate concern is the adjustment process the global
economy must undergo due to the rapid strengthening of the U.S. dollar and
nearly 1% rise in Treasury bond yields. The suddenness of these moves is
driving capital outflows from China, Europe and developing nations into the
United States. As many European and developing nations have already
been experiencing anemic growth, the challenges posed by a stronger U.S.
dollar and rising interest rates come at an inopportune time. China’s
currency reserves have declined by over $1 trillion in recent years and are
approaching the $3 trillion level. Recently the Euro has reached a multi-year
low, Italy is dealing with the need to form another new government
Near-term uncertainties
aside, equity investors
with a longer-term view
should continue to be
rewarded in the coming
years as the recovery
continues
ARS Investment Partners, LLC • 500 Fifth Avenue • New York, NY 10110 • 212-687-9800 • arsinvestmentpartners.com © 2016 ARS Investment Partners, LLC. All Rights Reserved
3
December 27, 2016
and to strengthen a weak banking system, the region is struggling with
immigration issues, and austerity programs have fueled anger and anti-
establishment sentiment in many nations.
We continue to believe that the global economy could be at an important
inflection point in which fiscal policy initiatives, encouraged by the OECD and
other leading institutions, begin to be implemented and become supportive of
monetary policy. In recent months the economic data out of Europe has
improved, and its sustainability may accelerate the introduction of more pro-
growth initiatives. As the chart highlights, there are several important
elections coming up in 2017 and 2018, and the pressure is growing for
Europe to replace its austerity orientation with pro-growth fiscal policy
initiatives. The European Central Bank (ECB) President Mario Draghi has
repeatedly called upon governments to implement fiscal policy to support the
ECB’s highly aggressive monetary policy initiatives. Until these countries
adopt more pro-growth policies, the U.S. will remain a magnet for capital
flows and among the strongest economies in the world.
Reasons for Cautious Optimism
For several years, we have discussed the United States being the standout
economy among developed nations. While the post-financial crisis recovery
has been muted, the U.S. has continued to be a global leader due to its
adaptability, innovation and resilience. Prior to the November election, the
U.S. economy was slowly but steadily improving. The Federal Reserve
We continue to believe
that the global
economy could be at
an important inflection
point in which fiscal
policy initiatives begin
to be implemented and
become supportive of
monetary policy
Global  Election  Cycle  2016-­‐2018
Country
Referendum  (s)
Legislative  /  
Parliamentary
Presidential
United  States
-­‐
November  2016
November  2016
November  2018
Brazil
-­‐
October  2018
October  2018
China
-­‐
September  2016
-­‐
France
-­‐
November  2016
April  -­‐  May  2017
June  2017
Germany
-­‐
March  2017
October  2017
May  2017
Italy
December  2016
February  2018
May  2018
Russia
-­‐
September  2016
March  2018
Austria
-­‐
September  2018
December  2016
Spain
September  2017
-­‐
-­‐
Greece
December  2016
-­‐
-­‐
Netherlands
-­‐
March  2017
-­‐
United  Kingdom
June  2016
-­‐
-­‐
March  2017
-­‐
-­‐
ARS Investment Partners, LLC • 500 Fifth Avenue • New York, NY 10110 • 212-687-9800 • arsinvestmentpartners.com © 2016 ARS Investment Partners, LLC. All Rights Reserved
4
December 27, 2016
recently announced that based on the improvements in economic data and
its projections for 2017, the FOMC anticipates three rate hikes next year.
Per the Council of Economic Advisors November 2016 Economic Indicators
report, U.S. corporate pre-tax earnings were projected to exceed $2.26
trillion with an increase of $78.3 billion for 2016 alone. After-tax earnings for
U.S. companies were estimated to be $1.69 trillion with an increase of $57
billion.
Personal income rose at an annual rate of $98.7 billion and is forecast
to be over $16.3 trillion, while wages and salaries rose $45.2 billion in
October. U.S. consumer net worth rose to an estimated $92.8 trillion in the
third quarter, and unemployment declined to 4.6% in the most recent report.
The Trump campaign platform identified four major economic policies which
have created excitement about the future – infrastructure spending,
corporate and individual tax reductions, lowering regulatory burdens and the
repatriation of corporate cash held overseas. In 2016, taxes on corporate
income were forecast to be $565 billion which represents a 25% rate as
many large corporations were paying well below the 35% statutory rate. The
President-elect has proposed lowering the rate to 15%, while the House plan
targeted a 20% rate. Even a 10% reduction in corporate taxes would
improve after-tax profits by over $56 billion with small and medium sized
businesses benefiting significantly. For consumers, any reduction in
personal income taxes would be welcome. Personal income taxes are
estimated to be $1.99 trillion in 2016, and much of the benefit of lower taxes
would likely be spent. Additionally, if the new Administration is effective in its
commitment to reduce unnecessary regulatory burdens, small and mid-sized
companies would again benefit significantly as would large corporations. In
speaking with small-business owners, lowering regulatory requirements for
them may be the most important element of the Trump platform as it would
make doing business less complex and costly. Estimates vary for the total
amount of U.S. corporate cash held overseas ranging from $2-3 trillion
dollars. If corporations are incented to bring home some portion of this cash,
there could be a significant ripple effect throughout the economy. If $1.5
trillion were to be repatriated at a 10% tax rate, the government would
receive $150 billion and corporations would have $1.35 trillion for increased
capital expenditures, dividends and/or share buybacks.
These policies are forecast to widen the deficit by anywhere from $3-6 trillion
over the next decade, but those numbers could vary significantly depending
on the ability of these fiscal policies to raise GDP growth and tax receipts. It
remains to be seen whether the President-elect’s campaign anti-trade
rhetoric becomes a reality, but this would likely offset the positives of the
fiscal policy initiatives described above. Given the selection of Rex
Tillerson
,
the CEO of Exxon Mobile, as Secretary of State as well as other Cabinet
appointments, we anticipate that the Trump Administration trade policies will
be more pragmatic than the campaign rhetoric would suggest.
We anticipate that
the Trump
Administration trade
policies will be more
pragmatic than the
campaign rhetoric
would suggest
The Trump campaign
platform identified four
major economic policies
which have created
excitement about the
future – infrastructure
spending, corporate
and individual tax
reductions, lowering
regulatory burdens and
the repatriation of
corporate cash held
overseas
ARS Investment Partners, LLC • 500 Fifth Avenue • New York, NY 10110 • 212-687-9800 • arsinvestmentpartners.com © 2016 ARS Investment Partners, LLC. All Rights Reserved
5
December 27, 2016
Investment Implications
This Outlook highlights the positive potential for change in key areas over the
medium term. With investor sentiment potentially getting ahead of itself in
recent weeks, we approach the New Year a little guarded but with an
opportunistic bent. Over the medium term, however, we see investment
opportunities in many of the areas we have emphasized over the past year,
including companies with strong secular growth characteristics, high quality
companies with attractive and growing dividend payouts, opportunistic
investments in out-of-favor areas in the market, industries with special
catalysts, and U.S. domestically-oriented businesses (especially small
capitalization companies). Recently we have also increased exposure to
companies that will be direct beneficiaries of new administration priorities,
such as infrastructure investment and defense spending. We are also
focused on defensive, divided-paying stocks that have been discarded by the
market and have become more attractive since the election. With the U.S.
economy and consumer confidence improving, the outlook for small
capitalization stocks has also improved. As previously mentioned, the more
domestically-oriented, smaller market capitalization companies should be
major beneficiaries of the proposed tax cuts, the stronger U.S. dollar,
infrastructure spending, lower regulatory burdens, repatriation of overseas
cash from larger corporations and increased merger and acquisition activity.
The combination of these forces should increase after-tax earnings for these
companies. In the New Year, we will take advantage of any market
dislocations to build positions in the beneficiaries of our Outlook.
Important Update
We are also pleased to announce that effective December 20, 2016, the
firms of Somerset Capital Advisers, LLC led by Michael Schaenen and Ross
Taylor and Artemis Wealth LLC and PS Management, Inc. led by Sean
Lawless, have formally merged with A.R. Schmeidler & Co., Inc. The firm
has been renamed ARS Investment Partners, LLC. The combination of our
firms will allow us to better service our clients’ evolving needs in the coming
years. In January 2017, we will be introducing two new investment
strategies which leverage the collective capabilities of our expanded team –
the ARS Focused Small Cap Strategy and the ARS Focused ETF Strategy.
The ARS Focused Small Cap Strategy intends to invest in companies with
market capitalizations ranging from $100 million to $2.5 billion. The strategy
employs a high-conviction approach resulting in a portfolio of 15-20 small-
cap companies. The portfolio is long biased, while attempting to mitigate risk
via cash levels, prudent short sales, inverse ETF’s (Exchange Traded Funds)
and option strategies.
With investor
sentiment
potentially getting
ahead of itself in
recent weeks, we
approach the New
Year a little guarded
but with an
opportunistic bent.
Over the medium
term, however, we
see investment
opportunities in
many of the areas
we have
emphasized over
the past year
ARS Investment Partners, LLC • 500 Fifth Avenue • New York, NY 10110 • 212-687-9800 • arsinvestmentpartners.com © 2016 ARS Investment Partners, LLC. All Rights Reserved
6
December 27, 2016
The ARS Focused ETF Strategy is designed to concentrate investments in
ETFs that provide the greatest exposure to ARS’ highest-conviction themes.
This may lead to investments in “narrow” industry ETFs. Typically, the
portfolio will focus on 5-10 themes that will result in 10-20 ETF investments.
These new offerings are just one example of the benefits of our firms coming
together. We are delighted to expand our investment and service
capabilities with these talented and experienced managers whom we have
known for several years. We look forward to introducing you to our new
colleagues at the earliest opportunity.
We want to wish all of our clients and readers Happy Holidays and a
healthy, joyful and prosperous New Year!
The information and opinions in this report were prepared by ARS Investment Partners, LLC
(“ARS”). Information, opinions and estimates contained in this report reflect a judgment at its
original date and are subject to change. ARS and its employees shall have no obligation to
update or amend any information contained herein. The contents of this report do not constitute
an offer or solicitation of any transaction in any securities referred to herein or investment advice
to any person and ARS will not treat recipients as its customers by virtue of their receiving this
report. ARS or its employees have or may have a long or short position or holding in the
securities, options on securities, or other related investments mentioned herein.
This publication is being furnished to you for informational purposes and only on condition that it
will not form a primary basis for any investment decision. These materials are based upon
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including, without limitation, any express or implied recommendations or warranties for
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ARS Investment Partners, LLC.
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