I’m tracking the first 100 days of the Trump administration very closely.
If you look at history, the decisions the president makes through mid-April oftentimes serve as the tone-setter for his entire first term.
Already, Mr. Trump has withdrawn from the Trans-Pacific Partnership by executive order.
The TPP was a trade agreement between the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
The trade agreement’s official demise will have aftershocks, I can assure you.
So we’d be foolish not to invest alongside them.
Put simply, in the aftermath of Trump’s withdrawal, I’m urging investors to immediately sell all stocks domiciled in a certain Pacific Rim country. Yet I’m suddenly extremely bullish on another Pacific Rimmer.
My senior analyst, Martin Hutchinson, has all of the details.
Chief Investment Strategist, Wall Street Daily
Question: Hi there, Robert Williams here, founder and publisher of Wall Street Daily. I have with me today Wall Street Daily’s distinguished senior analyst Martin Hutchinson. Now, Martin is a former U.S. Treasury adviser and Citibank VP, so his insights are second to none when it comes to geo-macro issues and the movement of money throughout the global financial system. Welcome, Martin.
Martin Hutchinson: Great to be with you.
Question: Martin, what’s at the top of your radar screens today?
Martin Hutchinson: The most interesting thing that’s happened this week – and there have been a lot of interesting things – is President Trump stopping the Trans-Pacific Partnership trade agreement by executive action.
Question: This has a potential to disrupt the entire market, Martin?
Martin Hutchinson: It certainly has the potential to be very important for the countries concerned, which are a couple of Latin America countries — notably Mexico — and then also a lot of close U.S. allies in the Pacific basin region. It’s important on both the manufacturing and the service sides.
Question: If you don’t mind, Martin, can we get our readers up to speed on exactly the who, the what, the why on the partnership and why this is very important?
Martin Hutchinson: Probably stopping the trade agreement is on balance a good thing. Because although it was called a free trade agreement, it didn’t do all that much for free trade. The U.S. light trucks duty was going to be phased out only over 30 years, while the United States still didn’t get full access to the Japanese meat market, which it wanted. So there wasn’t a huge amount done for manufacturing. Indeed, the Congressional Budget Office saw the cost for U.S. manufacturing at $44 billion, which was balanced by a benefit of $79 billion on the service side — mostly copyright and patent fees. Because the thing this trade deal really did that was important was impose the Digital Millennium Copyright Act on the other 11 countries. And that, for example, would have allowed Disney’s Mickey Mouse to charge copyright for 99 years from when it was invented in 1928. And also bring the much more detailed and complex U.S. patent arrangements for the other 11 countries, which would therefore give you a whole bunch of patent lawsuits and so on — which are not really good for free trade. Though, obviously, patents in general are necessary.
And so on balance, it’s probably beneficial that it’s gone, particularly if you’re interested in manufacturing, as President Trump is. Because according to the Congressional Budget Office, it was going to cost manufacturing a lot of money.
Question: OK, makes sense. So when you look into this, Martin, have countries emerged already in the Pacific that are going to do well and that aren’t going to do well?
Martin Hutchinson: Yes, I think there have been some winners and losers apparent. For example, Japan was hoping to increase its manufacturing exports to the U.S. through the TPP. It’s now not going to be able to do so. And that’s a country with slow growth, far too much government debt, more than 200% of GDP … and a negative interest rate — very aggressive central bank. And so that looks to be in some trouble going forward.
Question: So you’re bearish on Japan as a result of all this?
Martin Hutchinson: I think that’s right, yes. And I’m sort of neutral on Australia in the sense that mineral prices as rising, so that’s going to help that economy.
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Question: And are there countries that you are bullish on?
Martin Hutchinson: Yes, the areas I am mostly bullish on are the Asian countries Indonesia, Malaysia, the Philippines, Thailand, Vietnam — where the IMF says that they’re going to grow at 5% in 2017 and 2018. And that’s pretty attractive. Of all the Asian countries, the most attractive I think is probably the Philippines.
Question: Tell us why, Martin.
Martin Hutchinson: Well the Philippine market was flat last year, but the Philippine peso dropped a bit. People were worried about the election of President Duterte; President Obama’s administration didn’t like him much. But actually he’s pretty much committed to the free market. He’s diversifying from the U.S. He’s developing new trade relationships with China. But he’s also pretty likely to be Trump friendly; he has a fairly similar personality. The Philippines has 6% growth — both last year and this year and probably next year. So there’s some real benefit to go for in that country.
Question: You feel like the Philippines can be an outperformer when measured against a global market as a whole?
Martin Hutchinson: I think so, yes. There’s one particular sector that’s doing well — business process outsourcing, which is growing very rapidly. And that’s interesting because TPP wouldn’t have made a huge amount of difference to that because you can’t impose a tariff on outsourcing a business process. There are no goods crossing borders. It’s all done electronically. And so that’s somewhere where the Philippines I think can continue to grow.
Question: How can one of our readers benefit from this? Is there an individual stock to buy, perhaps an ETF? How do you recommend getting some portfolio exposure?
Martin Hutchinson: Most of the Philippine stocks are pretty thinly traded in the United States, if they’re traded here at all. A lot of them don’t have ADRs. So I’d recommend in general buying a broad index ETF — the best of which is the iShares Philippines ETF (EPHE). It gives you a broad access to the market. That’s around $34 currently with a 0.8% yield — and a very reasonable expense ratio of 0.62% which, given the Philippines is a fairly difficult market, is very reasonable. So that looks the most attractive way to play it, as it’s a rapidly growing market,
Question: You favor that over any type of individual Philippine stock plays?
Martin Hutchinson: I think so, yes. It gives you a broad coverage — and the individual stocks, by and large, don’t trade at all actively in the U.S. You’d have difficulty getting in and out. Whereas with this iShares ETF, you’ve got a broad access over the whole market. And basically, you’re looking at the whole Philippine economy as being attractive.
Question: Perfect. And if you don’t mind me asking, Martin, what’s on tap next?
Martin Hutchinson: Having looked at the Asian countries, I want to have a look at Mexico, which is the other country that’s very affected by TPP ending. And they’ve got an additional problem that NAFTA’s going to be reviewed by President Trump, as well. And of course, they’re a member of that with Canada and the U.S. But the currency has declined by about 17% in the last year. So I want to look at a way of benefiting from the currency decline without having to worry too much about trade agreements. And I think I found one.
Question: Awesome. And we’ll discuss that next time?
Martin Hutchinson: We will, indeed.
Question: All right, Martin, thank you for your time.
Martin Hutchinson: Great pleasure.
On behalf of senior analyst Martin Hutchinson, I’m Robert Williams, signing off.