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This month’s issue of The Samra Report will focus on President Trump’s proposed policies, identify areas of concern, as well as areas of opportunity.  As the market continues to show early and stable gains, bearish investors and the media continue to plant the seed of concern, reminding investors of past bubbles.  While the Wall Street Journal is correct in identifying a recent trend, where the bond and equity markets move in tandem, “a sign some investors may be losing faith”.  The Wall Street Journal fails to mention investors now have more options to choose, and no longer have to decide between treasuries or muni’s.   Investors have lost patience with low yielding treasuries, resulting in negative real-returns, and have moved into other areas of fixed income or alternative investments. 

The Samra Wealth Management 2017 Year Ahead report, highlighted some alternatives to fixed income investors, our consensus in High-Yield, Emerging Market Sovereign Debt and TIPS remains strong given the current global economic outlook.  For equity investors, 2017 continues to look like a good year, as President Trump’s policies could have a significant impact on domestic companies with cash held overseas, as well as the defense sector, industrials and financials. 

As low yielding treasuries have provided negative real-returns, the following fixed income investments are our best recommendations within this segment for 2017:

High-Yield Corporate Bonds

Although inflationary increases, and rising interest rates are bad news for High-Yield, growing demand and declines in default rates help the cause of high-yield, making it a good recommendation for the year ahead.  Investors of high-yield in 2016 witnessed a 17.5% return.  We recommend conservative investors look towards allocating to both high-yield and investment grade corporate bonds.

Emerging Market Sovereign Debt

Although EM bonds are threatened by the strengthening greenback, sovereign emerging market debt with attractive valuations purchased with a currency hedged strategy, look to be a good bet for the long-term investor.

TIPS

As long-term rates rise in an improving economy, credit is more attractive than duration.  As inflation increases TIPS maybe the closest return to a risk-free investment.  Conservative investors should look towards TIPS, as they protect from the eroding effects of inflation.

President Trumps tax plan stands to benefit some of the largest multinationals in the United States.  Effectively a tax break, allowing for the repatriation of foreign earnings.  The main beneficiaries of repatriation would be focused within the sectors of Healthcare and Information Technology.  Potentially allowing for billions of dollars to enter the U.S. economy at a much lower tax rate.  The following table shows the largest beneficiaries of repatriation.

Although we have highlighted the beneficiaries of the President’s tax reform policy, and there is significant support for these policies, as the chief executives of 16 companies, including GE, Oracle and Pfizer, sent a letter to congressional leaders in support of the GOP tax plan.  However, retailers like Walmart that expect their after-tax costs to rise substantially are upset, and for good cause.  Businesses importing apparel, or parts for assembly within the U.S. will experience most of the impact of a border tax, potentially laying more hurdles for the recently troubled auto industry, and disappearing mall staples such as Sears.  Off-price retailers like Burlington Coat Factory and Ross Stores are best positioned because they import virtually no goods from abroad.  The Economist estimates that the U.S. dollar would have to rise 25 percent to offset the proposed border adjustment tax. The following graph shows the areas that look to bear the most impact, as well as those areas that could benefit from a cross-border tax. 

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President Trumps policies look to face backlash, and have a detrimental effect on cross-border trade.  Regardless, we continue to recommend overweight allocations in:

Financials

Stand to benefit from President Trump’s Wall Street friendly policies and the prospect of lower corporate taxes.  Although Financials gained 22.8% in 2016, with rising interest rates and strong valuations, the financial sector looks to benefit in 2017.

Healthcare

With steps, already underway to repeal and replace Obama Care (ACA), we believe the aggressive terminology, translates to “refine”.  Given the loss of tax revenue generated by the Federal Government, and 20 million Americans would lose healthcare coverage, refining ACA is the most likely outcome.  Healthcare also stands to benefit from two other areas: (1) the repatriation of foreign earnings, and (2) the increase in demand in emerging market healthcare, prompted by an aging population.

Technology

With technological innovation impeding on all other areas of business, this looks to be a good year for technology.  Although there is concern over Trump’s immigration policies, repatriation should offset these concerns.

Industrials

With the Trump Administration’s promise of expansionary fiscal policy, we expect Industrials to see a boost.  With the prospect of a $1 trillion investment in infrastructure over the next decade, lower corporate taxes boosting business investment, and an increased military spending proposal of $20 billion, for a total of $603 billion, the near future looks good for Industrials.  

The Presidents foreign policies, attitude and campaign promises are creating opportunities away from the S&P 500.  At Samra Wealth Management, we expect small and mid-cap businesses to benefit from pro-growth policy actions, lower corporate taxes and reduced ADA requirements.  Given the administrations friendly and forgiving attitude towards Russia, and the year-to-date decline in the MICEX (-7.89%), we believe Russia presents a buying opportunity on a non-currency hedged trade. 

2017 continues to look like a promising year for investors, as President Donald Trump continues to build his dream team cabinet of business friendly-billionaires.  Although the Presidents methods and goals are unconventional, as we voyage into unchartered territory, we expect to see more volatility in March, given the following:

March 2         Northern Ireland Election

March 9          Key ECB Meeting

March 14-15    Key Fed Meeting

March 31         Self-Imposed Deadline for Brexit Talks*

 

*Referendum is likely to start a domino effect of Scotland and Northern Ireland separating from the British Union.

 

 

 

 

 

 

 

 

 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor

Samra Wealth Management, A Member of Advisory Services Network, LLC