Credit Suisse still constructive on equities after Trump win

Credit Suisse remained constructive on global equities in the wake of Donald Trump’s US election win, as it highlighted the benefits to defence, infrastructure and pharmaceutical plays.

The bank said most of Trump's more troubling policies, such as those on immigration and protectionism are likely to be toned down, while some of his other policies like more fiscal spending and a cut in the corporate tax rate could be positive for stocks.

Trump has suggested he would cut corporation taxes to 15% from 35%, which would provide a boost to earnings per share.

“Thus, we can envisage a set of circumstances under which this election result is positive for equities, although we would caution that markets tend to overreact to political shocks.”

The bank trimmed its mid-2017 target for the S&P 500 to 2,200 from 2,300 to reflect increased uncertainty.

It said that in a worst-case scenario – in which Trump implements all his proposed policies – the index could drop by 10%. However, this is unlikely.

“Above all, equities should be supported by a high equity risk premium (5.5% versus a warranted of 5.2%), earnings revisions are positive for the first time in three years and a number of factors could catalyse a bond to equity switch.”

In terms of sectors, CS said defence and infrastructure plays should benefit, highlighting stocks such as Thales, Raytheon, CRH, Wolseley, and Assa Abloy. Trump has pledged to spend double what Clinton had proposed on infrastructure, i.e. at least $500bn.

CS said both CRH and Wolseley are trading significantly below their post-crisis norm on a 12-month forward price-to-earnings relative to the market.

As far as the pharmaceutical sector is concerned, the bank reckons it has priced in too much political risk, effectively discounting a halving of the price differential between European and US drugs, and stocks are now around 20% cheap versus their norm on dividend yield relatives.

CS pointed out that since Clinton’s price gouging announcement back in September 2015, the US pharmaceutical sector has underperformed by 11%.

Credit Suisse also expects banks to benefit from the Trump victory on the back of rising yields and a friendlier regulatory environment.

In addition, it said companies linked to fossil fuel should benefit, along with the energy sector if a less open foreign policy stance is taken with Iran.

Where the dollar is concerned, CS said that although it would sell off on protectionist concerns, the potential for faster growth and rising bond yields should ultimately be supportive.