Chris Burrell Square Photoshopped

Welcome to the January No2 edition of the Burrell Blog for 2017.


Early Days but Trump Risks Reduce


Like many, your Diarist has spent many hours over the past couple of months endeavouring to understand the likely key touchstones in the early Trump era. On 4 January 2017, an early 2017 Blog issued under the heading “Taking some profit from the Trump rally”.  Several clients had asked the question concerning building up cash balances going into 2017, perhaps by lightening some banks and financials.

With the strong performance of the Australian stock market and the risk factors surrounding 2017, the question deserves serious consideration. The S&P ASX 200 index  improved 8.9% from the BREXIT lows around 30 June 2016 of 5233 and 10.5% from the Trump electoral day low on the 9th of November of  5156 to close the year around 5700 points.

The dominant factor driving up bank stock prices over the past 3 years has been the dividend yield driver ie. Dividend yields on bank stocks at over 5% fully franked are attractive compared to current low interest rates, particularly TD’s where rates have more than halved since the GFC. However every time the bank prices have moved up, some external event has brought them back. The most dramatic correction was in April 2015 when the global banking regulators meeting in Basel, Switzerland promulgated increased capital requirements for global banks. These new rules saw the Australian banks peak in April 2015 and fall in the ensuing 5 months to 30 September by 25%. CBA fell from over $90 to $72 and the other banks fell from high $30s to around $30. In fact ANZ and NAB continued to fall, due to particular issues surrounding those banks and have only recovered in recent months.

The Bank of International Settlements was due to announce the “Basel IV” reforms in January, but lobbying from Germany, whose banks would not have complied, lead to deferral of Basel IV. The Australian banks have gained a reprieve from Basel IV.

The Trump rally since the US Presidential election (still ongoing) parallels that when Reagan was elected. The Republican policies have some commonality. In the ensuing first year of the Reagan presidency, the US stock market fell by 20%. Part of this was the reality that the President is one cog in a complex wheel and there are many checks and balances in the US political process. In fact it was not until the second Reagan term that material tax cuts were delivered. There is a strong argument for Deja vu in that while the President may wish to increase infrastructure, increase defence spending and reduce taxes, there will be long term Republican members of the Congress and the Senate who will insist such measures be revenue neutral. It should be remembered that the Republicans refused Obama spending which was not revenue neutral in a number of instances.

One of the difficulties for share market investors in Australia is the lack of consensus on a whole range of global issues. The USA has always been considerably more myopic than say Australia. The US stockmarket has rallied since the election and seems to have factored in tax cuts and economic stimulus.

January 4 blog took the view that Trump may do well on defence & infrastructure spending.

 A first move was to ask Japan to make a meaningful contribution to the US defence budget to reflect the cost of Japan’s defence. This is likely part of a broader strategy to pull back from the role of the USA as global policeman and it is likely there will be some pull back also from NATO, or at least the extended NATO which allowed a series of fringe countries to in theory be subject to NATO protection. It may result in the US recognising Russian areas of influence in some of the fringe countries such as the Ukraine etc. Such a strategy would be positive for US defence manufactures as countries realise a need to be more self-sufficient.

In respect of taxes, it has been widely publicised that US corporations have significant sums in Ireland and other offshore countries, because it is subject to full corporate tax if remitted to the USA. A free kick for the President is to allow the remittance of this money and to apply the corporate taxes raised to infrastructure spending outside the major cities.

Unlike the Australian economy, the US economy is quite strong with unemployment halving from 10% after the GFC to around 5%. This is in contrast to a weak US economy at the time that Reagan was elected so that it was easier to use fiscal stimulus to achieve good outcomes. The US bond market has factored in considerable stimulus with the US ten year treasury yield increasing from 1.45% in July to 2.47% currently. This is one of the factors that has led to the stronger US currency.  Stronger US currency makes it harder for the President to achieve a resurgence of manufacturing, as it makes it more attractive to produce in offshore US countries. Trump has talked the currency down in recent days, but this may only be temporary.

But the biggest risk reduction around likely Trump policies concerns trade. “The Donald” has threatened a big border tax eg on China. Yesterday he clarified that his concern is around countries that want free trade access to the US markets, but have tariffs & restrictions on export of US goods & services into their countries. China is guilty of this & the Trump negotiating tactic may well be successful.

In conclusion you diarist continues to hold the view from the January 4 Blog of carrying a level of cash into 2017 and 10% maybe a useful guideline. Likely sectors for lightening include listed property & international, as well as selected stocks. Your diarist sees the risks around Trump as being more understandable. The largest issue may be that an already expensive USA stock market has priced in further upside & there will be a reality check, although timing is uncertain. There are other global events in a hard BREXIT & elections in Europe.

Should there be market or stock corrections as a result of various global events, the question as always will be to focus on the value of the underlying businesses that we are able to buy or sell both in Australia and overseas. Ultimately it is the research and views on the values of these individual businesses which should drive portfolios. Currently there are several interesting companies in Australia which are good value. It is always a danger to get lost in market sentiment, although sentiment should not be ignored. Value of the business, the economy (ies) in which the businesses operate (GDP Australia, China, USA etc) and sentiment are three key factors in understanding markets.

Business people everywhere will rejoice at having last year’s elections in Australia & the USA behind us!


Happy Investing.


Chris Burrell

Managing Director


As always, if you have any questions please don't hesitate to contact your advisor on (07) 3006 7200 or email This email address is being protected from spambots. You need JavaScript enabled to view it.


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