February 14, 2017    4 minute read

Trump Tweets: Risks and Opportunities

Assessing the Damage    February 14, 2017    4 minute read

Trump Tweets: Risks and Opportunities

Donald Trump has been active on Twitter for a long time. He has expressed his views on corporations and key executives, causing significant changes in companies’ share prices.

A few companies were directly affected by the President’s tweets in the past two months. Five tweets from Trump managed to significantly affect the markets:

After Trump’s tweet about Toyota, the Japanese enterprise’s share price immediately dropped 3%. Trump attacked the company after it announced new plans to build factories in Mexico in order to produce more of their Corolla cars, tweeting: “NO WAY! Build the plant in US or pay big border tax!”.

Two days before that, General Motors faced a similar situation. The American automaker had planned to produce parts for its Chevy Cruze in Mexico, but President Trump was quick to threaten the manufacturer will a high border tax.

These two examples show that share prices have been sensitive to the President’s tweets. But what does this trend imply? There are two key points to consider – market manipulation and tilt in corporate policy.

Market Manipulation

It is clear that Trump can affect markets just by tweeting. This fact can be problematic as people close to him could take advantage and profit from the significant plunges in share prices. Imperfect information also brings more volatility to the market, which means bad news for amateur traders or investors. The growing uncertainty might scare them away from investing.

History shows that currencies can also be affected and manipulated. Theoretically, Trump’s tweets could also have an impact. On January 17, Trump commented that the dollar was too strong. This drove the Dollar Index down 1%.

Changes in Corporate Strategies

After the boards realise how much damage the President’s tweets can do, they have an incentive to reposition their long-term strategy in a way that is perceived as positive by Trump.

In this sense, companies would deviate from their purposes of meeting shareholders’ expectations and maximising their interests. Management teams could start asking themselves if they are with Trump or against him.

For example, by laying off staff to cut costs, a firm would be defying Trump’s goal to boost US employment and, therefore, could face a potential tweet attack from the President. United Technologies Corporation is a good example as it showed support for Trump by trimming the number of jobs sent to Mexico, where the labour cost is lower.

Investors’ Perspective

What can investors do to predict the risk of a new presidential tweet? Many sectors are affected by Trump’s policies, so investors may study the policies to figure out how tweets could affect the relevant sectors. For example, the repeal of the Dodd-Frank Act may be favourable to banks and financial institutions because there will be more room for profit when regulations are loosened.

Since Trump won the election in November, the S&P 500 Financial Sector rose 18%, outperforming the benchmark (S&P 500). The potential driver is the president’s proposed deregulation. So what would happen if the Dodd-Frank Act was repealed?

The requirements for capital and reserves for financial institutions would be lowered and proprietary trading would be allowed again. There would also be looser over-the-counter regulations.

Financial Sector outperformed the Index from Nov 2016

(Source: GSPF S&P 500)

Investors can also try to predict Trump’s reactions by assessing the management style of a company’s executives. For companies with young, urban and liberal customers, it is effective to go against Trump. For example, Starbucks’ CEO decided to hire over 10,000 refugees in the next five years, all over the world, after Trump’s travel ban.

Buying Opportunities

It is true that share prices dropped after Trump’s tweets. However, the prices usually recovered within a few days. If investors hunting for short-term profits, they may buy shares after the drop and gain from the mean reversion.

Traders may also profit from the Trump tweets by buying and selling the same securities in different exchanges to profit from the small price discrepancy. The drop may be a good chance to add a position to the current portfolio. The longer the time frame, the less important the short-term price fluctuation.

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