It came as a sudden shock, but the election of Donald Trump to the US presidency has given investors a chance to revisit their portfolios and shake up their strategies.
Financial markets rallied with surprising fervour in the immediate aftermath of the ballot: Wall Street rocketed to a record high, investors poured into European shares and the ASX enjoyed its highest one-day jump in five years.
While things simmered down on Friday, the outlook for the new President-elect has prompted the beginning of a steady rotation away from the yield plays and into cyclical stocks.
Infrastructure and commodities
While most agree that infrastructure in the United States is in desperate need of repair, new construction has been a difficult proposition given disagreement on how to fund it and how much money to put aside. Given Trump's control of the presidency, the House of Representatives and the Senate, investors are speculating that things might move a bit quicker.
"Expect things to happen!" says Randal Jenneke, head of Australian Equities at T Rowe Price. "There is no 'gridlock' in Washington...at least for a while."
During the campaign Trump discussed various investment proposals, including pouring funds into roads, bridges and airports and, at other times, investing between $US500 billion to $US1 trillion over a decade.
"Trump likes to build stuff! The focus on infrastructure plays directly to this. This is clearly good for commodities and mining stocks," says Jenneke.
Already Australian mining stocks are feeling the love. The iron ore price has been on a tear, rallying to $US74.12 a metric tonne on Friday, the highest level since November 2014, after gaining 94 per cent from December's low.
Australia's resource giants BHP Billiton and Rio Tinto have followed suit, each soaring over 14 per cent higher since Wednesday's result.
But experts say copper stocks are likely to experience a boost, given copper demand should increase if these American infrastructure projects materialise. In the last 18 months copper traded around $US2 a pound, but in the last two sessions since Trump's win, it's rocketed up 15 per cent.
"The US has traditionally been the swing factor for copper when they do infrastructure projects, they're second behind China as the world's biggest demand," says Viral Patel, head of Australian research at T Rowe Price. "That would be great for some Australian copper producers."
BHP's Olympic Dam mine is the biggest exporter of copper, and Rio Tinto's Mongolian copper project is slated to come online in 2020.
And some of the smaller players, Oz Minerals and Sandfire Resources for example, all have capacity to supply if there is a pick up in demand.
Patel also says mining services companies, such as WorleyParsons, will enjoy a lift (albeit a slight lag), given mining companies are edging towards exploration stage again.
Bond Proxies
But while all this projected spending may give resources a hefty lift, experts suggest investors tread cautiously with stocks vulnerable to a rise in bond yields, like infrastructure groups, utilities and property trusts, often described often as "bond proxies".
Trump's ascendancy has prompted Credit Suisse to call the "end of the yield trade", citing as the culprits greater fiscal stimulus in the United States, a growing budget deficit and a winding back of free trade agreements. This – combined with the promise to reign in US companies' overseas job creation –means companies with high valuations, high financial leverage and high payout ratios are in trouble.
"Recently low bond yields have supported the valuations and profitability of some listed companies," says Hasan Tevfik, head of Australian equity analysis at Credit Suisse. "Whereas now we continue to be wary of higher bond yields and the impact on Aussie stocks."
Safe-haven income stocks Macquarie Atlas Roads, Transurban and Sydney Airport Holdings all slid during the week and are likely to stay on the nose while bond yields are rising. Property trusts Scentre Group and Vicinity Centres also fell out of favour as appetite for yield wore off.
However, other yield stocks like Qantas, Beach Energy, Metcash and Ansell are less sensitive to a turnaround because of their lower payout ratios, less financial leverage and the fact they trade on lower valuation multiples.
"In the medium term, if Trump is able to execute on his policies, there is perhaps even more reason to be concerned about rising bond yields," says Tevfik.
Healthcare
One of Trump's most well publicised vows was to roll back President Obama's health care legislation, which has depressed healthcare stocks since its implementation as it squeezes the margins of private insurers.
In addition, Hillary Clinton had advocated for a restriction on drug-price increases, which gave pharmaceutical firms a hard time leading up to the election.
"Prior to the election the market was betting healthcare stocks would come under pressure, so they've lagged the benchmark" said Patel. "But since the election, they've gained traction and that includes Australian healthcare companies as most of them are US-exposed."
Investors anticipating a repeal of the Affordable Care Act and the evaporation of the price cap risk caused healthcare stocks to soar. CSL (which dominates the Australian healthcare landscape), ResMed, Cochlear and Fisher & Paykel – which all do business in the US – are likely to enjoy some support should some of the regulation in the industry be relaxed.
