American investors seem naively trusting of President-elect Trump’s economic plans. On one hand, they say those wild campaign pledges to slap stiff tariffs on Chinese and Mexican imports in pursuit of the most protectionist US trade policy since the 1930s should not be taken too literally. On the other, they conclude that a Trump presidency definitely means heavy investment in infrastructure, which will be excellent news for all those suppliers of raw materials and equipment needed to upgrade roads, bridges, schools, tunnels, electricity networks and so on.
Both thoughts are understandable, of course. Even Trump has never been firm on the idea of 45% tariffs on China. It was a threat “if they don’t behave,” he said during one debate, “it doesn’t have to be 45%, it could be less”. Plenty of scope there to water down the policy.
Yet the pledge to spend $1tn on new infrastructure is being taken as if it is firm, irreversible and a gift from Washington. Look at the share prices of some London-listed companies that could, potentially, benefit. BHP Billiton, the world’s largest miner, is up 15% this week. So is Ashtead, which rents out mechanical equipment in the US.
The optimism looks to be a case of too much, too soon. Remember, Trump has not pledged to splurge $1tn of pure federal money. Such a policy would indeed be a financial gift for many sectors. But any president, even one whose party controls both houses of Congress, would struggle to get such a programme of massive expansion approved by the fiscal hawks.
It seems far more likely that Trump’s $1tn figure refers to money he hopes other people will provide, albeit encouraged by tax breaks and partnerships. It all counts in the end, of course, but marshalling public-private partnerships on such a grand scale is time-consuming work and the US market is underdeveloped compared to Europe. Nor, as Trump will find, is private capital inclined to shoulder many risks before opening its wallet: it tends to demand rock-solid, inflation-proof returns, as the UK as learned to its cost.
For now, investors seem happy to celebrate the direction of travel. Fair enough, there seems to be a broad consensus in the US that an infrastructure upgrade is required. But it’s the small print that will matter. Investors would be well advised to believe the $1tn figure only when they know what it is.
Why drugmakers need to take a chill pill
In similar vein, investors in healthcare stocks should curb their enthusiasm. Hillary Clinton, who had pledged to cap drug prices, will not be entering the White House but it’s hard to know what Trump’s changes imply. Pascal Soriot, chief executive of AstraZeneca, has the right idea. While it is safe to assume that Obamacare will be scrapped or heavily modified, “nobody knows what the new landscape will look like”.
AstraZeneca’s shareholders know the feeling: Soriot keeps telling them that “an inflection point” is arriving, meaning a return to sales growth. In the meantime, they must live with the reality of competition from generic manufacturers to the group’s cholesterol pill, Crestor. Thursday’s figures revealed the generic effect is every bit as severe as feared.
ITV’s slide: structural upheaval or a hiccup?
In some corners of the media world, such as newspapers, 20% annual declines in advertising revenues – at least in print – have become the norm in the digital age. Commercial television has suffered nothing similar but here comes a figure to make you wonder: ITV expects its advertising revenues to fall 7% in the final quarter of this year. For 2016 as a whole, that implies a slip of 3%, the first annual decline since 2009.
The start of structural upheaval or just a hiccup? For the time being, ITV deserves the benefit of the doubt. If one takes a grand sweep, television still claims about 26% of all advertising spending in the UK, roughly the same as a decade ago.
ITV’s chief executive, Adam Crozier, can also say, fairly, that the company these days is less of a hostage to the UK advertising market. ITV Studios, the production business, sells programmes such as Victoria and Poldark around the world. That is one reason why full-year earnings for 2016 will roughly match last year’s.
Yet the outlook for the ad market still drives the share price, which is down by a third since the EU referendum was called in February. If ad buyers’ confidence returns in the new year, long-term shareholders have nothing to worry about. But ITV is at a crucial juncture. It has showered investors with dividends, including specials, for the past three years. Judge Crozier’s true level of confidence only when he reveals next year whether he thinks he can sustain the generosity.
