Henderson: Tech under Trump - implications for investors

In the week following the US presidential election the technology sector has seen sharp underperformance. There has been a noted market rotation out of technology into cyclical and more interest rate sensitive sectors such as financials.

Over the last 20 years we have seen a number of pauses in the outperformance of the tech sector in the aftermath of an election, typically lasting three to 12 months and would not be surprised to see this dynamic play out again. The change in administration and in particular the fact that there is now a Republican President and Republican majority in the House of Representatives and the Senate, has created optimism over regulatory relief and fiscal stimulus to drive the US economy. Based on the 100-day plan outline by the President-elect, it is likely that we will see corporate tax reform, an infrastructure investment bill, and increasingly protectionist trade policies in 2017.

The areas most likely to impact on the technology sector include:

Tax reform

Given the tech sector has the strongest balance sheets and highest level of cash held overseas the sector will be one of the largest beneficiaries of any tax repatriation deal. We could see an increased level of capital return to shareholders through dividends and buybacks, and rising  merger and acquisition activity as large cap tech stocks put their repatriated cash to work. However, as technology companies generally have lower tax rates than other US companies they will benefit less from lower corporate tax rates.

Infrastructure investment

Increasing industrial productivity and capital investment are positive for the technology sector.

Trade tariffs, protectionist trade policy

This is potentially the most threatening to the sector (and the global economy). Such policies could be reflationary for the US but with mixed effects on emerging market economies, with Mexico and China probably worst affected by potential tariffs/movement of production back to the US. This would likely have negative impacts on margins and demand for technology products, causing the technology sector to benefit less from reflationary domestic policy.

Conclusion

We still believe that over the mid to long term technology will continue to take share in the global economy, driven by better functionality/lower prices and supportive demographics. In addition, the US-centric domicile of the technology sector means it will probably disproportionately benefit from lower US tax rates on both earnings and repatriated foreign cash piles compared to global equities. However, within the US technology companies will be hurt more than other US companies by any curtailment of globalisation and will benefit less from lower tax rates, which could hamper near-term relative performance against the S&P 500.