Some days I wish I could just forget about work as soon as I leave the office. Some days I can’t wait to get to work to distract me from the outside world. It’s all a bit Severance. The hit AppleTV sci-fi thriller follows a team of workers for the shadowy corporation Lumon Industries who have undergone a procedure known as ‘severance’. Their non-work memories are separated from their work memories, meaning that while they’re in the office they have no knowledge of their outside life but as soon as they step outside they have no recollection of what their job entails. It’s meant to be a dystopian premise, today, for me at least, it sounds like bliss. So leaving aside my outside world views which are very strongly held, let’s switch into portfolio manager mode.
As of this morning, it seems like the US elections are going to lead to a Republican sweep. The UK equity market has responded positively in early trading. This is likely due to an expectation of a US government that will be focused on cutting regulation and driving economic growth. If this scenario plays out there should be a number of beneficiaries within the UK Opportunities portfolio. CRH, the provider of building materials, is heavily exposed to US construction and infrastructure spend. Smurfit Westrock, the packaging provider, has recently increased presence in the US market following the acquisition of Westrock. Flutter, the owner of brands such as FanDuel and PaddyPower, will hope for further deregulation in the US market and a stronger US customer.
Following on from the rhetoric of the election campaign, and experience of the previous Trump administration, there will be less certainty over the reliability of the US protective umbrella. This will place pressure on ‘allies’ to increase their own defence spending. We have exposure to this via holdings like Babcock.
The key economic concern investors had ahead of the election was the impact of increased tariffs. Stocks exposed to global trade are expected to be negatively affected. Interestingly, however, we recently had a meeting with a company that would typically have been placed in the ‘short Trump’ basket. They argued that supply chains had already adapted following the imposition of tariffs in 2018 as part of the ‘America First’ economic policy. Indeed, many of these tariffs have continued through the Biden administration. This company felt they were positioned well to adapt to any further changes. While we view tariffs as definitely unhelpful for growth in the long-run, we think fears of any short-term impact are overblown. Increasing domestic price levels will add to transitory inflationary pressures and this might mean that the pace of future rate cuts by the Fed are delayed. Such a scenario would probably lead to a stronger dollar than would previously have been the case. Within the portfolio there will be a mix of beneficiaries (e.g. industrial cyclicals with USD earnings) and those that are negatively impacted (e.g. those with higher USD costs than revenues).
On our favourite daft wee laddie level, it just feels like there’s a sense of relief that we’re past both this election and last week’s UK budget. Both had been weighing on consumers and those making investment decisions. Things had felt stuck for quite a few months and, for better or for worse, having some clarity about the future should unclog matters. If only I could forget about all the other things. Severance isn’t reality-TV, that’s something the incoming president is a master of.