As bottom-up, fundamental investors focused on the long-term—three to five years—we tend not to position the portfolio around macro events. At the same time, given the potential for meaningful policy changes under the new U.S. administration, we believe it is important as investors to keep an eye on what is coming out of Washington as it relates to trade, regulation, and taxes.
While it is unclear exactly how the new administration’s trade policy will unfold, rhetoric coming out of Washington suggests the potential for a tougher trade environment for multinational companies.
As long-term, fundamental investors, potential short-term market volatility stemming from U.S. policy changes creates opportunities.
Many multinational companies have benefited from globalization and built supply chains across the globe. To the extent multinationals have a high reliance on foreign sourced inputs, a border adjustment tax could negatively impact profits.
In addition, dramatic changes to trade policy could trigger retaliation by other countries, making it more difficult for larger, multinational companies to conduct business. Our focus is on understanding the risks and opportunities associated with various policy outcomes for the companies within our large cap universe.
Unlike the trade risks, there is general optimism around deregulation and potential tax policies. It is widely accepted that there will be some degree of deregulation. Many investors believe that the increase in regulations over the last several years negatively impacted economic growth and decreased the ability of both large and small companies to compete globally due to higher compliance costs.
From a tax perspective, it appears likely that U.S. corporate tax rates will become more competitive with the rest of the world. The higher U.S. tax rate historically has led to companies investing in other parts of the world to the detriment of U.S. investment.
Should a lower U.S. corporate tax come to fruition, we believe structurally advantaged companies with unique products and services are more likely to retain the benefit whereas less differentiated businesses are more likely to have it competed away.
While we are keeping a close eye on potential policy changes, we remain focused on the long term and finding high quality growth companies. From our perspective, potential market volatility stemming from these dynamics creates opportunities.
As long-term, large-cap managers, we have the opportunity to take advantage of mispriced stocks within our universe of structurally advantaged companies when the market overreacts to short-term factors.