ASX players that might thrive under a Trump administration
Recent election results have sent US markets into a record-high rally however implications remain mixed for the Australian share market. See our top ASX picks that could do better under a second Trump administration.
Mentioned: BlueScope Steel Ltd (BSL), Iluka Resources Ltd (ILU), James Hardie Industries PLC (JHX), Tesla Inc (TSLA)
In an investing world that constantly encourages investors to make irrational decisions based on market-moving macroeconomic events, Morningstar’s investment philosophy champions the bigger picture.
Reactionary market movements amidst events such as elections, wars and recessions are not a new phenomenon. Policy direction within governments of significance (such as the United States) does bear weight on multinationals from the flow on effects of trade, taxation and several other variables.
However, research shows that patience and rationality pay off. Long term investors have weathered a series of seemingly destabilising events to ultimately come out on top. The chart below from Owen Analytics visualises a series of market-moving global events and the nominal returns of Australian and US shares. It appears that despite a constant stream of crises, markets demonstrate an overall upwards trend.
Source: Owen Analytics. 2024.
Of course, for those with a shorter time frame on their investments or a rigid requirement of liquidity at a set date, event-driven volatility does pose substantial risk. For example, the S&P 500 observed a 10% decrease in returns over the 1-Year period after the US army exited Afghanistan in 2021. If you had planned to draw down on your investments at this time, it would have taken a significant chunk from your total returns. Despite this, the S&P 500 is up almost 40% since this date, demonstrating the reward of patience and flexibility during periods of instability.
Where does this leave the market?
On the international front, Tesla’s stock has surged 39% since the election fuelled by CEO Elon Musk’s close ties to the Trump administration. The S&P 500 and Nasdaq Composite have also gained 5% each.
The ASX saw an almost 1% rally after the election with mixed implications for the local share market. ASX companies with US based operations are most likely to benefit from the change in hands. The proposed tax cuts and tariffs could benefit those companies as they may result in more protection and higher margins for US-based operations.
Despite being a politically inclined topic, this article was not written with the intention to deep dive into intricate policy proposals or discuss the implication of taxation and trade changes. For the most part, these remain largely speculative and susceptible to change.
The consequences of the Trump presidency aren’t black and white. Contrary to conventional belief about the Biden Presidency and an emphasis on the clean energy transition, his term saw traditional oil and gas stocks returning almost 250%. This revelation isn’t an isolated instance. Trump’s ‘American first’ platform in 2016 championed local production and manufacturing over cheaper offshore options. Counterintuitively, US small caps underperformed globally oriented large caps in the proceeding years.
Below we highlight ASX players who (at the right price) we believe might stand to benefit in a world of heightened geopolitical tension, deglobalisation and friendshoring. Only one of these companies present a cheap buying proposition whilst the other two are currently fair value and overvalued after share price increases since the election result announcement.
Our top picks:
Iluka Resources ILU ★★★★★
- Fair Value Estimate: $9.50
- Share Price: $5.57 (as at 13/11/24)
- Moat Rating: None
- Price to Fair Value: 0.58 (Undervalued)
- Uncertainty Rating: High
Earlier this year I explored Iluka Resources (“Iluka”) in the 2 cheapest ASX commodity shares, citing soft near-term demand for mineral sands as the primary reason for its discount to fair value.
The company is an international critical minerals company with exposure in exploration, project development, mining, processing, marketing and site rehabilitation. Iluka has been facing industry wide declining grade profile at its mines, but we believe a constrained outlook for supply should support prices.
The election outcome is likely to benefit Iluka’s rare earths refinery at Eneabba, Western Australia since China accounts for about 90% of global refined rare earth oxide supply.
Trading at over a 40% discount to our fair value estimate, Iluka Resources is primed to benefit from an acceleration in the West to reduce dependence on China.
James Hardie Industries JHX ★★★
- Fair Value Estimate: $51.00
- Share Price: $53.48 (as at 13/11/24)
- Moat Rating: Wide
- Price to Fair Value: 1.05 (Overvalued)
- Uncertainty Rating: Medium
James Hardie Industries (“James Hardie”) manufactures and sells building products for interior and exterior building construction applications.
The company benefitted from the strength of the US housing market in 2022 however we expect US activity to weaken in the near term as aggressive interest-rate hikes damp demand for new housing and pulled-forward renovations and remodelling activity normalizes.
However, the firm’s largely US-based supply chain positions it as a potential beneficiary to Trump’s ‘America first’ sentiment, emphasising local manufacturing opposed to overseas imports. Competing materials are often imported and higher prices for these competitors would likely benefit prices and/or volumes for James Hardie. Most ASX shares involved in the US housing market are set to get
Notably, they are also one of the few industrials companies under Australian coverage to earn a wide moat.
BlueScope Steel Ltd BSL ★★
- Fair Value Estimate: $17.70
- Share Price: $21.24 (as at 13/11/24)
- Moat Rating: Noner
- Price to Fair Value: 1.20 (Overvalued)
- Uncertainty Rating: High
BlueScope had a great day as the election results rolled in, rising almost 10% alongside US domestic steelmakers.
It’s Ohio-based subsidiary, North Star has mostly a US supply chain and makes up nearly 50% of the company’s total revenue. Despite potential tariffs likely to pose challenges to the Australian economy, BlueScope is likely to fall on the right side of these.
We expect steel prices to revert towards long-term averages after a pandemic-related explosion of steel prices. However, a rise in tariffs could discourage cheaper imports and support a recovery in the industry’s sales volume and prices.
Our base case still sees BlueScope as moderately overvalued however we do see upside potential if Trump is successful in implementing his tariff proposals.
Concluding thoughts
My colleague recently shared his thoughts on the election and advised investors to approach the results with humility, patience and consistency. As somebody who used to thrive from the excitement of speculative investments and market-moving macro events, this philosophy is something I’ve been converted to recently and encourage all investors to consider.
Amidst all the noise, we emphasise that valuations are a much more effective predictor of returns than the party who wins the White House. Morningstar research found that party affiliation accounts for only 0.8% of the variability of US equity market returns across presidential terms. However, the beginning valuation of the market explains almost 18% of the difference in returns.
Furthermore, we have extensively covered the returns of an individual timing the market vs a buy and hold strategy. A global macro trading strategy that attempts to pick stocks based on macro-influenced valuations is essentially a time-the-market approach. The power of compounding and time spent in the market exceeds returns from timing the market.
Beginning at Eisenhower’s Inauguration in 1953, if an individual invested $1000 but only owned the S&P 500 whilst a Republican was President, they would have $27,400 today. If a similar exercise was run when Democrats were the ruling party, it would result in a $61,800. Notably, if you stayed in invested the entire time you would have accumulated $1,690,000.
In conclusion, history has not favoured those who make binary conclusions in response to large geopolitical changes. Exercise caution and ensure every action is reinforced by your investment policy statement that outlines your strategy and criteria for stock picks.
