US smaller companies, technology and dollar-denominated UK dividend payers are areas investors should consider to take advantage of president Donald Trump’s economic policies, according to asset manager Charles Stanley. 
Earlier this week, Charles Stanley chief investment officer John Redwood explained the company’s view on the US, outlining that they remain happy investors in US equities thanks to the market pricing in too much pessimism.
He said Trump “will reflate the economy one way or another”, noting infrastructure spending, taxation and regulatory changes as his three key drivers for this.
In this follow up article, FE Trustnet takes a look at the areas the firm is recommending for investors looking to get early exposure to these changes before they have happened.
The first sector is technology, where chief investment commentator Garry White said taxation changes could bring a real benefit to the area.
Trump plans to lower corporate tax in an effort to entice larger globally-facing companies to repatriate their earnings to the US.
“We’re very positive on the proposals for tax with [the speaker of the House of Representatives Paul] Ryan on their side,” he said.
One sector that should benefit substantially from this is the technology sector, with some of its largest companies holding a lot of their profits outside America due to current tax limits.
“If they get that money back into America, while they may invest in manufacturing in the US a lot of it is likely to go into share buybacks. So that is a positive for the value of technology shares,” White said.
The US technology sector has performed especially well in recent years as the low growth environment has pushed investors into areas that have shown capable of increasing their cashflow at a fast pace.
Indeed, as the below shows, the sector has outperformed the S&P 500 by 38.31 percentage points over the last decade.
Performance of indices over 10yrs
Source: FE Analytics
As a result, the top five American technology companies now have a market value bigger than the FTSE 100.
But White said the sector is not as expensive as others might suggest, despite this strong period, and highlighted the innovation and the potential repatriation of capital as benefits in the medium-to-long term.
Redwood also noted: “They’ve come up a long way but there is more growth to go for and you really have to buy America if you want technology there is just not enough of it in any other market around the world.”
The other reason Charles Stanley is keen on the technology sector is the Donald Trump’s ‘U-turn’ on proposed trade sanctions with China.
“Technology companies rely on Chinese supply chains significantly for their products in America,” White said.
“Any sort of trade war with China would have really hit the technology industry but that doesn’t seem like it is going to happen now.”
The second area the team suggest investors look at is dollar-denominated UK dividend payers, with UK investors benefiting from the fall in sterling last year following the EU referendum in June 2016.
Performance of sterling vs dollar since the EU referendum
Source: FE Analytics
Indeed, the pound is down 13.72 per cent against the dollar since the Brexit vote, meaning dividends being paid in dollars have increased in value by the same amount.
“The main thing to consider is the dollar. It is very important for the UK FTSE 100 because the majority of the earnings are generated outside the UK,” White said.
“That’s why the FTSE 100 has been tracking what has happened to the pound for a lot of the last few months.”
“We think US interest rates are going to continue to be raised in a steady fashion which will support the FTSE 100 and particularly dollar earners in the FTSE 100.
“If you want to invest in the UK a strong dollar actually can boost your dividends because there are a lot of companies that pay their dividends in dollars.
“These are not just the oil companies and the commodity companies but others such as AztraZeneca pay their dividends in dollars and so does HSBC and Standard Chartered.”
The final area the team has tipped to benefit from Trump’s proposed policies is the US smaller companies sector, which they said should benefit from the burgeoning US economy.
However, White said investors should avoid large-caps as a strong dollar could cause issues moving forward.
“It makes their exports slightly uncompetitive and also when translated back into dollars it will also hit their earnings – the opposite effect to what we are seeing in the FTSE 100,” he said.
“So that’s why we are actually quite positive on small-caps in the US. We are very upbeat on the US economy so that suggests looking at the small-caps that are actually facing the American economy rather than facing the world economy.
Within the US smaller companies space, the firm recommends three funds – Brown Advisory US Smaller Companies, Findlay Park American and iShares MSCI USA Small Cap UCITS ETF.
All three funds have made similar returns over the last five years, returning 94.27, 97.71 and 94.72 per cent respectively.
Performance of funds over 5yrs
Source: FE Analytics
On Brown Advisory US Smaller Companies, White said: “The fund aims to achieve capital appreciation by investing in a concentrated portfolio of small cap US equities of above-average growth, sound management and favourable competitive positioning.
“Brown Advisory is an experienced and well-resourced small cap investor. It has a research-intensive process which we believe gives it a competitive advantage.
On Findlay Park American, he said: “Findlay Park American is a multi-cap US equity fund that aims to beat the Russell 1000 Net 30 per cent Total Return index over the longer term.
“The managers are watching the political landscape very closely, with emphasis on the potential corporate tax reforms.
“The team invest around a number of themes and have been placing a particular focus on companies with pricing power. Given the fund has been running a high level of cash for some time it has kept pace reasonably well with the rising US market and 2017.”
On iShares MSCI USA Small Cap UCITS ETF, he said: “This passive fund seeks to track the performance of the MSCI USA Small Cap Market Cap Weighted index, less charges. The ETF holds approximately 1,500 stocks and accumulates income back into the fund.”