Trump: turning out to be not so bad a thing after all

I spotted this going around the social media channels: a transcript of The Economist’s interview with Trump.

And I also spotted a copy of the economist in the office today which was far from flattering to the president. 
It also attempts to explain why Trumponomics won’t make America great again.


Oh really now?

The Economist is wrong.

Now to be completely honest, the day Trump won the election I thought we’d be in a lot of trouble, especially following on the heels of Brexit. The subsequent “Trump rally” I also (wrongly) believed to be a head fake.

It’s still going. And because Trump has little reason to mince his words (and equally little concern for political correctness), I’m entirely confident he goes through with his plans.

And the rally will continue. For years to come.

So think about it for a second: looking through the transcript, I take away 3 conclusions:

  1. US domestic growth is going to be ballistic, fuelled by pump priming, starting with the tax cuts.
  2. The accumulation of human capital and intellectual property in the US is also likely to accelerate, with more companies sufficiently incentivised to relocate.
  3. Trump is neither Republican nor Democrat – he’s a pragmatist and that’s not a bad thing, certainly better than being an ideologue short on achievements.

I haven’t heard this being used yet, but perhaps it might be a succinct one-liner for Trumponomics: Rebuilding the case for the American Dream.

And now we make a stock call: what’s the first company that comes to mind which ticks all the boxes on Trump’s ideal American company list?

  1. Makes in America.
  2. Invents in America.
  3. Supports American jobs and growth.
  4. Sells to the world, flying the Star-Spangled Banner.

Tesla.

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A second look at OBOR, Malaysia and Pakistan

If you haven’t yet heard about OBOR, you’re missing out on the greatest expansion of political, economic and (potentially) military influence since the ships of the British Empire set sail around the world.

China’s One Belt, One Road (hence “OBOR”) policy started a couple of years back, but hasn’t really picked up traction among investors. CITIC Securities, for one, has written extensively about it, although perhaps a good primer on the story is this transcript from a McKinsey podcast on OBOR and the accompanying effects on trade.

Why has this only caught on now? Can’t really tell, but perhaps it was because it was already known for almost a decade that the Chinese have been investing heavily in infrastructure all around the world, especially in places where no one else dares to venture: Africa and Central Asia especially. Take a trip to Kenya, and the moment you land in Nairobi, you’ll likely see a huge banner advertising for smartphones or networking equipment. The advertiser? Huawei, China’s version of Cisco Systems, Samsung, Nokia and Ericsson, all piled into one.

But I thought it would be interesting to look at two other countries in particular – not obviously related to each other, but extremely interesting.

Malaysia and Pakistan.

Why these two, one may ask? For one, they have been where China has been the most active in recent weeks. In Malaysia, Chinese investment has effectively been the bailout fund for the troubled 1MDB fund (for the sake of political sensitivities we won’t write openly about the details), with the final sum of Chinese inbound FDI into Malaysia coming up to at least US$33bn (according to the South China Morning Post).

Similarly, in Pakistan, where Chinese FDI has overtaken US FDI, along with a release from Pakistan’s IMF debt through a US$1.2bn bailout for the country. The heart of their investment plan in Pakistan is the China-Pakistan Economic Corridor (CPEC).

What’s the link between the two? Just take a quick glance at the world map and it all becomes clearer:

Map

Still not obvious? Here’s the theory, and it all stems from the argument that China challenges the US for its position as the benevolent hegemon. Not familiar with the concept? An article from back in 2004 explains the idea here.

In light of a gradually retreating US foreign policy (not necessarily less interventionist, but only where it suits and protects US interests), China is seeking to fill the gap. Already its state-sanctioned ownership of key infrastructure assets, not just in emerging/frontier markets, but also in developed markets (like its successful bid for Hinkley Point in the UK), puts it in good stead to fill the gap. Its representative in that operation, in particular, is China General Nuclear (its power subsidiary is listed 1816 HK) – the same CGN which, in Malaysia, has acquired about 23% of Malaysia’s generating capacity as part of the 1MDB bailout deal for US$2.3bn.

Are they just buying because they want to own the world? Sort of, but not in the obvious sense. Look again at the map – China is effectively stuck in containment: Japan and South Korea in the East, Singapore and (to some extent) the Philippines to the South, India to the West and Russia to the North. Their expansion is bounded either by US allies or by their own long-time rivals, or at the very least, an uncomfortable former sibling during the marxist epoch.

Pakistan therefore makes the perfect partner: by investing in infrastructure and building roads, railways and ports, all the way through central Asia to the deep water port of Gwadar, China gets access to Middle Eastern oil while at the same time bypassing the traditional trade routes bottlenecked at the Straits of Malacca by a US naval presence in Singapore. Most trade gets through without a problem, but when push comes to shove, having options never hurt. Moreover, getting oil and other commodities to the Western provinces of China is quicker through the overland route than going all the way round towards Dalian and Qinhuangdao, then shipping it all inland again.

And by now their expansion in Malaysia should also make sense: the investment in a high speed rail line (the East Coast Rail Link) spans the breadth of Peninsular Malaysia, from Port Klang on the west to Kuantan on the East (where a slightly disputed port and special economic zone is being mooted), and extending up to Kelantan in the North East. Still some years away from completion, this rail link confers an obvious advantage: if ships can’t get past Singapore, they’ll just call at Klang, unload, send the cargo over land to Kuantan, and continue from there. The strategic location of Singapore, while geographically important, can be overcome.

The construction of a port at Malacca itself is also interesting: Malacca used to be a Portugese trading outpost, A Famosa, and has changed hands between the British, the Dutch and the Portugese – a brief history of Malacca here. But aside from a great cultural scene and quite awesome ondeh-ondeh, it’s hard to see any reason for ships to call at the old port, given Port Klang and the Port of Tanjung Pelapas are just North and South of Malacca respectively.

Unless the port is doubling as a refuelling point for vessels sailing into the Indian Ocean and the Andaman – rendering China free to do as they wish, projecting their presence westwards.

And that, Ladies and Gentlemen, is why Malaysia and Pakistan are important.

Buying straw hats in winter

When I first started my career 6 years ago in equities sales, I was very quickly taught by my then-boss (and still a spring of wisdom today) of the importance of looking through the noise of the crowd.

One simple rule for making money: buy low, sell high. And to find the lows is like shopping for straw hats in winter.

Harder than it sounds. But not impossible. Going long Southeast Asia in 2015, buying Mining equities in early 2016 and positioning for an Indian bull market post demonetisation were some of the right calls guided by that principle.

Of course, sometimes it goes very wrong – like the dividend yield trade. But with hindsight that was in not keeping with the rules. Shopping for yield in 2016 was a mistake born from not recognising the fundamental change in the world.

The US market is recovering, Trump notwithstanding. And the Fed’s stability mandate suggests rates are by no means lower for longer in the face of growth.

More importantly, the Fed (and all other central banks) have shrinking relevance in today’s world. They stopped being relevant when the BoJ went for the NIRP bomb (great NY Times article on the Negative Interest Rate Policy here), and the world realised central banks had no more bullets left in the monetary policy gun.

Unfortunately for yield investors, growth is back in the US. It’s not back in a big way (yet) but the gradual advances of the Trump administration (tax cut – funded by… a border adjustment tax??) make it clear that Fed or otherwise, the long end of the UST curve is heading up.

Lest we forget that central banks’ monetary transmission mechanism is a mechanism, not an end-result in itself. 

But what of the broader market? The S&P trades at almost 18x forward earnings, and while US data seems to indicate better growth, the mood on the ground is skeptical.

How can the market still be heading up and rallying so hard after all that has happened? Trump’s bound to trigger a recession at some point!

Perhaps… or perhaps not. The S&P is at all-time highs, and showing signs of exhaustion. For sure it needs a break; the question is how long this break will be.

Consensus says it’ll be quite a long break – the tail risk is that the sell-off is shorter and shallower than we expect.

Update: spotted this in Barron’s last night, an interesting argument for why S&P multiples can keep expanding.