Brenton Saunders: Traditional energy sectors look like winners in a Trump world

Sweeping policy changes under a unified US Republican government signal shifts for investors, with traditional energy and nuclear set to benefit, argues Pendal’s BRENTON SAUNDERS

• Unified Republican government means significant policy changes
• Traditional energy and nuclear set to benefit
• Find out about Pendal MidCap Fund

SWEEPING policy changes in the US are expected to bring shifts for investors, with traditional energy and nuclear set to benefit amid a slower path to rate cuts.

That’s the view of Pendal PM Brenton Saunders, who has more than 25 years of experience in resources and started his career as an underground mining geologist.

Brenton leads Pendal MidCap Fund, which offers exposure to fast-growing ASX sectors.

Unified Republican control of the US House, Senate, and presidency is set to drive rapid policy changes that will shape market performance over the coming year, says Saunders.

Donald Trump’s decisive victory delivered a clear Republican mandate, defying expectations of a tight race and threats of a hamstrung administration.

The sweep of all three arms of government paves the way for significant shifts in energy policy, a renewed focus on nuclear power, and has heightened expectations for a slower path to interest rate cuts and higher-for-longer bond yields.

“For a long time, it looked like the election was going to be tight but that hasn’t happened.

“We’ve had a convincing Republican win which gives them a broad mandate for change,” says Saunders, who manages the Pendal MidCap Fund.

Energy and renewables

The new Trump administration signals a sharp shift in US energy policy, with implications for global energy markets and the renewables transition, says Saunders.

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“As a broad brush, you could see a more of a reversion to traditional energy. There’s an expectation for more traditional oil and gas production, certainly in the US and the Gulf of Mexico,” he says.

“That should keep energy availability relatively elevated, which ultimately should benefit economic growth and the consumer.”

In Australia, engineering group Worley and industrial services group SGH, formerly Seven Group Holdings, should be beneficiaries.

Worley plays a key role in the design and engineering of oil and gas facilities. SGH has first and second derivative exposure to energy through its direct investments and portfolio of heavy equipment suppliers.

The Trump administration may also accelerate the global shift to nuclear energy, says Saunders. This should benefit ASX-listed Canadian uranium developer NexGen Energy.

“Nuclear has risen to prominence and acceptability in most circles as a source of power under the decarbonisation banner – previously it was thought of as very old world,” he says.

The changing energy environment should also benefit local refiners Ampol and Viva Energy and should bolster Whitehaven Coal as metallurgical coal demand continues.

Gold is another sector set to benefit.

“We hold a considerable amount in the portfolio through companies like Capricorn Metals, De Grey Mining, Bellevue Gold and Genesis Minerals. Despite doing very well the whole year, gold has had a bit of a breather in the last month or so and we see that as a useful opportunity to buy the dip.”

On the downside, Saunders says he is cautious about the consumer discretionary sector as it battles high interest rates.

“Despite the fact that companies like JB Hi Fi have done well, most of the other discretionary categories are reasonably depressed, and potentially more so in the next six months or so until we see the effect of lower interest rates come through and help consumers.”

Diversification the key

The US is somewhat unusual in having such a lengthy period between November elections and the January inauguration of a new administration. This interregnum presents uncertainty for investors as markets speculate on what changes the political transition will bring, says Saunders.

“We’re again seeing binary macro scenarios being debated. That’s where the benefit of diversification comes into play – not taking big macro bets in your portfolios is key because the outcomes are likely to be more extreme than normal.

Geopolitics remains a significant driver of risk, with events in Russia, China, Ukraine, the Middle East, Israel and Iran all carrying the potential to disrupt markets, from oil prices to broader economic conditions, he says.

“You’ve got to be relatively conservative – diversification is probably the most important part of the next three to six months.”

Rate cuts delayed

Markets have performed strongly this year, and it has been difficult to disentangle the impact of Trump’s candidacy from the broader strength as markets adjust to the prospect of rate cuts, says Saunders.

“In the US, interest rates have dropped 75 basis points off the peak and, until recently,  there was the expectation of a lot more to come. But inflation and labour markets have stabilised and now there are question marks around the pace and the timing of rate cuts, not just in the US, but also domestically as well.

“Bond yields and forward interest rate expectations have risen and look like they might stay higher for longer.” Trump policies are likely to be more inflationary.

That has driven a rotation away from interest rate-sensitive sectors. REITS for example have stalled and partly reversed.

“We think that interest rate cuts are still fairly likely to happen within the course of next year, albeit at slower rate and possibly to a slightly higher neutral level than was previously thought.

“But domestically and internationally, more rate cuts in the offing should see some of the interest rate sensitive sectors do reasonably well again – once rate cuts resume.”

Saunders says the slower trajectory for cutting interest rates should change how investors approach the market over the next six months.

“It will likely prolong the downturn for home builders and suppliers – those companies that are reliant on the construction cycle to improve. You also run the risk of a poor consumption season if consumer sentiment takes a dip because of the expectation of higher for longer interest rates.

“So, you have to be very focused about where you’re taking your exposure.”