Investing in the Age of Trump

Automation is much more of a game-changer than the White House, panellists say.

Michael Ryval 25 May, 2017 | 5:00PM

Too much attention is being paid to the so-called Trump effect and not enough to looming economic challenges such as the impact of increased automation on jobs. This was among the views expressed by CIBC and Morningstar economists and a CI Investments manager who participated in this week's Morningstar Executive Forum. Moderated by Christopher Davis, a strategist at Morningstar Canada, the May 24 panel discussion examined the global macroeconomic outlook and investing in the so-called Age of Trump and was attended by about 75 financial-industry participants.

People may be giving U.S. President Trump more credit in moving markets than he deserves, argued Benjamin Tal, deputy senior economist at CIBC World Markets, a unit of Toronto-based Canadian Imperial Bank of Commerce. "If you look at the numbers such as the trend in the U.S. dollar and 10-year U.S. Treasury yields, Trump is a blip. People are starting to realize that Trump is not such a game-changer, from a market perspective, because he cannot do anything."

On the other hand, Tal added, investors still need to appreciate the spirit of populism that Trump represents, because it may be around for years. "The worst thing we can do is impeach Trump. The only way to defeat populism is to allow it to fail. That's Brexit, and Trump."

Tal predicted that Trump will face a slew of obstacles in trying to get Congress to implement his policies. "The cure is worse than the disease," said Tal, referring to Trump's intention to renegotiate the North American Free Trade Agreement (NAFTA). "That's what will slow Trump down."

The CIBC economist said uncertainty about the future of NAFTA is worrisome but should be put in perspective. "I'm not losing sleep over NAFTA, but losing sleep over the fog surrounding NAFTA," said Tal. Moreover, he noted that when the negotiations finally start they will be rancorous and difficult. "At the end of the day when the fog clears, the changes will not be so significant. The low-hanging fruit like lumber and dairy products will be there. But it won't be a game-changer. In fact, we can benefit from a revised agreement, especially when it comes to services. At the end of the day, the impact on Canada will not be significant."

The concerns about globalization that Trump invoked are only a continuation of the post-financial crisis of 2008-09, said Eric Bushell, senior vice-president and chief investment officer of Signature Global Asset Management, a unit of Toronto-based CI Investments Inc. That's why Bushell asked himself last fall how the upcoming battle between Trump's anti-globalization team and so-called centrists, who favour open markets, would unfold.

"It's been resolved in fairly short order and the centrists have effectively prevailed," observed Bushell. "And it's been manifested in the biggest asset move of the year. Emerging-market economies and stock markets have come screaming back from the Trump hit, and the centrists took the helm."

From an investment standpoint, Bushell argued that the opportunities were plentiful because automation will continue to expand and the world will see a "massive technological cycle." The lofty valuations on the NASDAQ index make sense, he added, and "the combination of confidence in the global economic outlook, and fear that your competitors will make that investment, is leading executives to find talent. They are in this scramble to secure talent that can help guide companies through this transition," said Bushell. "Every company, in every sector, will effectively be a tech company. That is where we are headed. This is going to bring out a lot of productivity, and will lead to good returns on investment."

Trump's desire to create more jobs, in an already strong U.S. economy, will not end in a solution, said CIBC's Tal. "It's not about cutting interest rates or investing in infrastructure. We have a major mismatch in the labour market and there are people without jobs, and jobs without people. For every job lost to trade, eight will be lost to automation. Trump cannot reverse that."

Tal said he's not bullish on the U.S. market. "When you look at it in December it will be more or less where it is now," he believes. "There will be some winners -- I like tech and energy and financials. But overall this market will not go to the sky."

Francisco Torralba, senior economist at Chicago-based Morningstar Investment Management LLC., agreed that creating jobs is the principal challenge facing the world today. "We might be seeing a major shift in the balance between labour and capital in the global economy. But whether it has political repercussions depends on the institutions," said Torralba. "The U.S. has a very thin social safety net, in terms of health insurance, for example. It's very unusual among advanced countries. We have seen the rise of populism in Scandinavia, but not to the extent that has driven Trump to the fore. It's important to look at it country-by-country to decide whether Trump could happen elsewhere." And looking at general trends in labour, Torralba admitted he was bearish and concerned about ensuring political stability while the forces of capitalism drive the global economy.

The market has put its sights too much in the short term and that's why markets rallied in the first few months after the election of Trump, said Torralba. "But in the long term, which to me means 10 years and longer, his views on made-in-America protectionism will be negative." The market has put more weight on less regulation and lower taxes, "which in principle will boost the growth rate. I think that's misguided, and protectionism will do a lot of harm to the U.S."

Other observations expressed by the panel included:

Trump's election win raises questions about the possibility of a similar political event in Canada, said Tal: "It's naive to believe that we are totally immune to this trend. The income gap is rising, and we all know that. And it's about educated people. Canada is the most educated country in the OECD, in terms of the numbers going to universities and colleges. But we are number one in terms of the numbers of educated people who live in poverty. We cannot translate those degrees into jobs."

China's economy is a worrying one, said Torralba, and represents one of the biggest downside risks for the global economy for the next three to five years. "They keep surprising us and growing and nothing dramatic is happening. But it has defied the macro-risk models because China is not a regular capitalist economy. They have state-directed capitalism which means a lot of investment is done because people in Beijing say so. I do keep worrying about China, although there is comfort in knowing the links with other financial systems are much more limited than, say, the links between the U.S. and the rest of the world's banks."

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Michael Ryval

Michael Ryval