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Institutional Investors: Winners and Losers if Trump Wins

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Today is Super Tuesday, and it seems Donald Trump and Hillary Clinton are the clear benefactors of these delegates. The mudslinging battles for U.S. party nominations are intense as the stakes grow higher. One of the goals of SWFI is to provide high-level insight and intelligence on how political events can impact asset owners, whether they are public pensions, sovereign wealth funds, or endowments. By focusing just on the Republican race for the party nomination, one can see Donald J. Trump, a New York City developer and reality TV star (NBC’s The Apprentice), amassing a pool of delegates, broadly across the United States, except for U.S. Senator Ted Cruz picking up Texas and Oklahoma. The self-funded candidate Trump continues to lead in many polls. From analyzing various financial media, there is some consensus that Trump’s populist appeal and policy uncertainties could provide headwinds for large multi-national companies.

On the fixed income side, U.S. Treasuries would benefit, as uncertainty, especially in global trade and other policies, would cause more foreign institutional investors to flock to safety.

Here are some themes that institutional investors may want to consider in the case of a Trump presidency:

WINNERS

1.) U.S. Stocks with Little International Exposure
Portfolio managers could anticipate a long-term increase in domestic capital expenditures from U.S. producers in the areas of industrial manufacturing. If the U.S. produced more goods and services, employment in the US could increase. However, if the U.S. reversed too many trade flows, the U.S. dollar could become too strong, thus negatively impacting exports. In effect, global trade may slowdown. Japanese and Latin American equities would be greatly impacted if trade flows slowed.

In addition, Trump as a candidate supports lowering the U.S. corporate tax rate and changing in repatriation rules, which would bring more capital back to U.S. shores. This would be a boon for U.S. companies.

2.) The Safe Bet – U.S. Real Estate and Treasuries
Many wealth funds and pensions view U.S. core real estate as a store of value, with an inflation hedge. Cash flowing real estate would most likely be in even higher demand, as institutional investors would want to park more capital in the United States.

On the fixed income side, U.S. Treasuries would benefit, as uncertainty, especially in global trade and other policies, would cause more foreign institutional investors to flock to safety.

DRAW

Quicken China’s Move Toward a Consumption-Based Economy
A Trump administration may expedite China’s transformation into a consumer-based economy by negating and challenging large trade deals with the United States. If trade decreased, it could significantly reduce China’s foreign reserves which are already decreasing at the moment. However, China’s State Administration of Foreign Exchange (SAFE) could counter by depreciating the Renminbi even lower.

LOSERS

1.) Hedge Funds Closing
If Trump were to become U.S. President, more U.S. hedge funds could possibly shutter, some transforming into family offices. Hedge fund owners and managers could be negatively affected by Trump’s tax plan. Trump said to the media back in October 2015 that hedge fund guys are “getting away with murder” by “paying nothing” in taxes. Trump would get rid of carried interest for “speculative partnerships that do not grow businesses or create jobs.”

2.) Big Pharma to Take a Hit
Large pharmaceutical manufacturers might be at risk here as Trump has stated numerous times that he intends to negotiate with drug companies. Medicare is the biggest purchaser of drugs and is prohibited by U.S. law from seeking better prices. Drug companies such as Pfizer, Johnson & Johnson, Novartis, Sanofi-Aventis, GlaxoSmithKline, Merck, Roche, Abbott Laboratories, AstraZeneca, Eli Lilly and Bristol-Myers Squibb would be at risk in their stock prices.

3.) Longer Period of Low Oil Prices
According to the latest government figures, the United States produced an average of 9.43 million barrels a day in 2015. The price of oil would probably remain low, as the Keystone Pipeline would probably go through. Furthermore, the U.S. oil boom would continue to grow, thus negatively impacting the finances of OPEC member nations.

As the U.S. Election Day draws near, institutional investors should anticipate how each final candidate could impact their portfolio.

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
www.swfinstitute.org

Apple’s Ginormous Corporate Cash Pile Plans to Come Home

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The positive economic effects of U.S. President Donald Trump’s tax reform have already altered the financial behaviors of major U.S. companies such as Wal-Mart Stores, Apple Inc. and AT&T.

In response to the tax law reform, many American businesses, large-to-small in annual revenues, have issued bonuses, granted awards and signaled plans to increase capital expenditures in the United States. For example, Apple announced plans to give its employees US$ 2,500 each in stock awards. A key section of the new U.S. tax reform law includes a provision for firms to take advantage of a one-time payment of 15.5% on repatriated funds down from the 35% rate.

Initial Plans

With the Dow Jones Industrial Average (DJIA) reaching new highs and the tax reform deal signed into law, Apple revealed they would invest US$ 350 billion into the United States economy over a period of five years, as they repatriate massive piles of money from overseas. The iPhone maker estimates they will payout roughly US$ 38 billion in tax payments from the overseas repatriation – thus shifting back some US$ 245 billion out of the US$ 252.3 billion it has held offshore. Apple also plans to spend an estimated US$ 30 billion in capital expenditures over the next five years, with roughly US$ 10 billion in U.S. data centers, according to the company. Apple has plans for 20,000 more jobs to create. The company that was once led by Steve Jobs had faced substantial criticism in the press over outsourcing its manufacturing to China to avoid paying U.S. taxes and lower manufacturing costs. Many of those facilities in China had labor issues such as environmental concerns, slave-like wages and extremely long work hours.

“We believe deeply in the power of American ingenuity, and we are focusing our investments in areas where we can have a direct impact on job creation and job preparedness,” said Apple CEO Tim Cook in a statement on January 17, 2017. He added, “We have a deep sense of responsibility to give back to our country and the people who help make our success possible.”

Liquid Financials and Fixed Income Changes

The sales growth of the iPhone has been a major factor in the growth in Apple’s cash pile. In 2006, Apple moved to act, forming a subsidiary in Nevada to manage investments, initially starting with around US$ 13 billion to manage. Nevada has no corporate income tax and no capital gains tax. Apple manages its investments through an outfit in Reno, Nevada called Braeburn Capital Inc. (Braeburn is a type of Apple), a subsidiary of Apple. Apple also employs some 40 to 50 external fund managers to handle the massive portfolio, according to sources. Braeburn has tried to reduce money management costs by using more separate accounts, while reducing dependence on money market funds.

As of September 30, 2017, Apple has a large investment portfolio worth an excess of US$ 300 billion, with US$ 194.714 billion in long-term marketable securities. Some US$ 128.645 billion are in current assets, with US$ 20.289 billion in cash and cash equivalents.

Focusing on the investment portfolio, some US$ 152.724 billion is held in corporate securities, with US$ 55.245 billion in U.S. Treasuries. Most of the portfolio is held in fixed income investments, including mortgage-backed securities – generally mandating investments be investment-grade and the avoidance of losing principal. Since 2012, Apple has been hoarding more corporate debt, rivaling some bond funds. Only about US$ 799 million are held in mutual funds (non-money market). Apple is also a major buyer of commercial paper across the globe. For example, the company participated in a US$ 500 million issue of 3-year floating notes from Hyundai Capital Services. The tech giant even uses derivatives to hedge against currency and interest rate movements.

The Old Scheme Ends

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CPPIB Partners with Lendlease on £1.5 Billion U.K. Build-to-Rent Venture

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The Canada Pension Plan Investment Board (CPPIB) has announced the launch of a £1.5 billion venture with Australian listed construction giant Lendlease Group centered around the development of build-to-rent private housing in the United Kingdom. The new infusion of capital will bolster the £800 million already committed to various projects in the Britain’s housing sector by Lendlease, which will develop, construct, and manage homes built through the partnership.

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Mubadala-Owned Falcon Bank to Begin Accepting Blockchain

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Zurich-based Falcon Private Bank Limited, which is owned by Abu Dhabi-based Mubadala Investment Company, has announced that it will now be accepting wealth originating from new and existing clients’ blockchain assets, reaffirming its position in the private banking industry as a first-mover in adopting distributed ledger technology. Assets will be accepted provided that they pass required due diligence to ensure full compliance with anti-money laundering (AML) and know-your-client (KYC) regulations and laws. The Swiss bank’s auditor PricewaterhouseCoopers (PwC) has reviewed the process, according to a press release.

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