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US equities after the Trump rally – any opportunities left?

It’s very easy to make the bear case for US equities right now: valuations are high, and the market has priced in all the good things it expects from Donald Trump and none of the bad stuff. But that may be too simplistic a view.


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The deregulation opportunity

Three of the major things promised by Trump before he was elected were tax cuts, ‘fair’ trade deals and deregulation. And it’s actually the latter one Trump stands the best chance of delivering on, said Janvier.

“Trump needs to work with Congress on taxes and trade, but the executive branch has almost total control over deregulation because the President can decide whether to enforce regulation or not,” he said. “The impact of deregulation [on profitability] is difficult to model, but that’s where the biggest impact could be.”

And small cap companies would be the biggest beneficiaries of this, believes Janvier. You would of course expect him to say this as he manages a smaller companies fund, but he has a point. “Regulation gives larger companies a comparative advantage because small companies have less resources to deal with a heavy regulatory regime,” he says.

In sectors are expected to benefit from deregulation, such as healthcare, financials and energy, it could therefore pay off to invest in smaller rather than in large companies. “Catalent, a pharmaceutical company we own, would for example benefit if it becomes easier to register a new medicine for example,” Janvier told Expert Investor.

“Nabors Industries, an oil drilling company we also own, would benefit from energy deregulation.” And it will probably do so a lot more than an international company like ExxonMobil that also has large downstream activities.

If you care about good governance and the environment, deregulation would of course be less of a good thing, and Janvier realises that can create a dilemma. “I may disagree with a lot of this deregulation on a personal level, but in the end I have to serve the interests of my clients which is to invest in the companies with best return opportunities.”

Though research has shown that using ESG-filters provides better risk-adjusted returns on the long-term in many asset classes partly because of the additional costs for companies associated with increasing regulation, the opposite may well be true for US stocks under Trump.