Donald Trump is President. Those four words caught global markets by surprise on Wednesday night, as volatile Wednesday trade on the S&P/ASX 200 Index (ASX: XJO) demonstrated investors did not expect a victory by the Republican candidate. Nevertheless, with the beginning of a new era, global markets appear to be coming to terms with what a Trump Presidency means for the global economy.
If Thursday's remarkable reaction is anything to go by, so far, it's a thumbs up.
Notably, however, one sector which appears to be worse-off is the yield stock sector. Businesses like Macquarie Atlas Roads Limited (ASX: MQA), Transurban Group (ASX: TCL) and Sydney Airport Holdings Ltd (ASX: SYD) are falling today.
Here's why.
Government spending
One of Trump's staple policy pieces is to lift infrastructure spend by building roads, hospitals, schools and airports in America. Global markets regard this increased spend as stimulatory on the economy, with many predicting higher US inflation as a result.
Put simply, higher inflation is good for economic growth. However, the biggest loser as a result of higher inflation will be bonds and bond proxies, as investors are likely to find riskier assets offering better growth potential.
Overnight, US treasuries sold-off sending bond yields surging. Australian treasuries were not far behind either, with Bloomberg reporting 10-year Australian Government bonds fell (lifting the yield on offer).
Yield versus growth
The evident losers of higher bond yields are safe-have income stocks like infrastructure groups and property trusts.
At the time of writing, each of Macquarie Atlas Roads Limited (ASX: MQA), Transurban Group (ASX: TCL) and Sydney Airport Holdings Ltd (ASX: SYD) traded down in excess of 4%. Property trusts Scentre Group (ASX: SCG) and Vicinity Centres Re Ltd (ASX: VCX) were not far behind either, sustaining falls of over 2%. This indicates the lustre of their safe-haven yield status is wearing off.
On the flipside, though, higher inflation bodes well for companies leveraged to economic growth cycles. BHP Billiton Limited (ASX: BHP), Incitec Pivot Ltd (ASX: IPL) and Fortescue Metals Group Limited (ASX: FMG) seemingly fit this bill, partially explaining their blockbuster rises on Thursday. Brave investors that bought during Wednesday's sell-off would have done well – though it is unclear how much upside is left after Thursday's stellar surge, which is why I would stay away from these sectors for now (at least until their is more certainty on Trump's policies).
Foolish takeaway
Despite Donald Trump's resounding victory in both the Senate and House of Representatives, it is still unknown how easily he will manage to implement his policies. Although the chances are quite high given his clear majority, I believe it's too premature to lose faith in infrastructure darlings and move to growth stocks. After all, it is unlikely that an increased infrastructure spend will have a negative effect on toll roads, shopping centres and airports based in Australia.
Although higher bond yields could mean the key driver behind recent gains in these types of shares will be lost (i.e. the flight to defensive yield), each of the above-mentioned stocks remain solid businesses in my opinion, and should therefore have limited downside from current prices. Accordingly, I recommend monitoring these infrastructure and property stocks to find an attractive entry point for addition to a diversified portfolio.
