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This Is What The Market Thinks Will Happen To The “Trump Repatriation” Cash

Friday, November 18, 2016 18:50
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(Before It's News)

Donald Trump’s election victory has driven significant rotation
across global markets. Bond yields are up, the USD has
strengthened, DM equities have risen, EM equities have fallen and
cyclical stocks have outperformed defensives.  Amid the chaos,
Citi’s Global Equity Strategy team has attempted to craft some
“Trump Trades” to help investors take advantage of the

While the trade recommendations were not terribly surprising,
really just a suggestion that current market rotations will
continue, what struck us was the degree to which certain Trump
policy ideas, like the repatriation of US dollars from overseas,
have already been baked into markets.

Just yesterday ""
target="_blank">we noted
that Trump’s repatriation tax holiday
had likely contributed to at least some of the USD’s strength over
the past week.  That said, we also pointed out how misguided
that theory was given that most dollars held overseas are actually
held in US currency and repatriation, therefore, wouldn’t result in
any incremental buying.

Similarly, while many have hailed Trump’s repatriation tax
holiday as a positive for U.S. capital investment, per Citi’s
latest note, the market has different ideas about how that money
will be spent once it reaches domestic shores…share buybacks. 
In fact, Citi points out that prolific share repurchasers
have seen their stocks outperform the broader markets by nearly
5-points since election day
.  Perhaps, someone should
explain that it will probably take a couple of years before this
type of legislation can be drafted, passed and implemented? 
Never mind, just keep buying.

Tobias Levkovich’s US share-shrinker portfolio has risen
sharply relative to the S&P following the US election. Clearly,
the market thinks that much of the capital repatriated from
overseas will be returned to shareholders
, and maybe much
of the corporate tax cut as well. This doesn’t bode especially well
for those who hope policy changes will encourage a significant
pick-up in US company capex.

target="_blank"> ""
alt="Buybacks" width="500" />

The other Citi “Trump Trades” are mostly just a continuation of
the market rotation we’ve seen playing out over the past couple of
weeks.  The “Buy Equity Dividend Yield” trade has now,
courtesy of higher bond yields, conveniently morphed into “Buy Even
Higher Cyclical Equity Dividend Yield.”

We don’t believe that the search for yield is dead but
it may be changing. We now favour our “cyclical yield”
This picks global stocks with decent dividend
yields and healthy growth rates. Unlike other equity income
strategies, it tends to outperform when bond yields rise. The
median stock in the screen is yielding 3.8%, offering annual
dividend growth of 13%. That still seems a good deal compared to
the global government bond index yielding 0.9%.

Finally, the other big Citi “Trump Trade” suggests buying
Developed Market equities over Emerging Market equities. 
While the basis of the trade is somewhat founded in the idea that
Trump will pursue more protectionist policies, the crux if
Citi’s argument is that DM equities are better positioned to absorb
higher bond yields.

The global market response to the Trump victory has been to
accelerate a global reflation trade that had
already been gathering pace since the start of July. 10-year
government bond yields are up across the world (Figure 4).
Expectations of a more hawkish Fed have driven the US$ higher.

Across equity regions, investors have responded to the
Trump victory by buying the US and selling EM
(Figure 5).
While the weakness in EM can be explained by sensitivity to a
rising US$ and fears of protectionism, many have found the
strength in the S&P more perplexing.

After the Eurozone crisis, low interest rates and QE policies
were more successful in driving down risk premia in fixed income
than equity markets. This has left DM equities better
placed to absorb the impact of higher government bond
Duration, EMU periphery, EM and corporate bond
trades look less well placed. The ERP could fall further. This
tends to be most positive for cyclical stocks and

target="_blank"> ""
alt="Trump Trades" width="500" />

So 1 month ago, we were told that U.S. equities should rise
because bond yields would be low forever, discount rates should
trend toward 0% and therefore equity valuations should trend toward
infinity over time.  Now, we’re told that despite bond yields
surging we can still count on U.S. equities trending toward
infinity because they’re better positioned to absorb higher rates
than emerging markets.

In summary, just buy U.S. equities.

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