ClearBridge’s Peter Bourbeau: Will US GDP growth hit lift off under Trump?  

• Share Trump’s fiscal reforms and proposals to deregulate may support stronger economic growth
• Growth should benefit all sectors but cyclical stocks in particular, however, Bourbeau needs more confidence in policymaking before adding to cyclicals

President Trump’s proposed programme of deregulation and tax reform could power US economic growth to its highest level in years, says Peter Bourbeau, manager of the $452m Legg Mason ClearBridge US Large Cap Growth fund.
Bourbeau, who co-manages the fund with Margaret Vitrano, says President Trump’s range of mooted policies could – if successfully enacted – jumpstart the US expansion, with a particular emphasis on cyclical stocks, which have been out of favour.
“Should fiscal stimulus, tax reform and a looser regulatory environment become reality, economic growth has the potential to accelerate to levels that we haven’t seen in 20 years,” he says. “Such an event should benefit all sectors with cyclical stocks continuing to do well.”
US GDP was consistently above 6% between 1996 and 2000, and although it dropped in the early noughties, it jumped back above 6% again between 2003 and 2005, peaking at 6.5%.
However, since the recession of 2008, growth rates have been lower, the economy expanding at a slower pace than the highs achieved in either the Clinton or Bush eras. Advance estimates for 2016 put full-year growth at 1.6%[1].
Despite the potential for higher GDP growth under Trump, Bourbeau says he is not yet increasing the portfolio’s exposure to cyclical names.
“The fund is positioned for a low growth environment and we will need to gain more confidence in the prospects for improved growth before making major changes,” he says.
Instead of cyclical names, the portfolio is currently skewed towards companies which can grow their revenues regardless of the economic environment. Core holdings include Alphabet, the parent company of Google, retail giant Amazon, and Microsoft.
Bourbeau says it will become clear over the first half of his current term whether Trump is able to deliver on his plans. “We will know within the first two years of Trump’s administration about his ability and will to get ‘big’ things done,” he says.
Bourbeau adds that if Trump’s policies support significant economic growth, it could make conditions more difficult for a number of sectors as the US Federal Reserve would be forced to hike rates aggressively.
“All of this potential policy response comes with a price. We see higher rates, potentially much higher, as the Fed will be forced to respond to higher growth and higher inflation,” Bourbeau says.
“We think the market can absorb most of this rate pressure, but income-oriented sectors like utilities and real estate could be more susceptible to losses from higher rates.”
[1] Source: Bureau of Economic Analysis (BEA)