GlaxoSmithKline has appeal after Trump victory

The reaction to Donald Trump’s election victory has been surprising. First, stock markets sank. Then they rose. Now at the time of writing they are falling once more. Clearly, the only thing that investors can be certain of is that uncertainty will be high over the short to medium term.

Part of the reason for this is that Trump is a known unknown. He has no long-term track record in politics and it is impossible to know exactly what policies he will pursue. In fact, there is a good chance that even he does not yet know exactly how he will seek to improve the US economy. That’s why in my view it’s a good idea to own companies which have a relatively low positive correlation with the economy. One example of this is GlaxoSmithKline (LON:GSK), which I believe will outperform a volatile wider index over the medium term.

Old Trump Vs New Trump

Perhaps the most striking part of election night was Trump’s victory speech. It was a complete contrast to the gung-ho, pumped up and bullish tone which he had struck throughout the election campaign. Trump instead talked about uniting America and being a President for all Americans, words which at the time of writing at least, seem to have placated the markets somewhat.

However, one speech does not instantly erase the policies which Trump has been shouting about in the last couple of years. His desire to protect American jobs and make trading agreements less favourable to other countries mean that the world could take a step back from an era of increasing globalisation. Similarly, his apparent admiration for Vladimir Putin could cause uncertainty in the Middle East and even in Europe, while a tougher stance on China could lead to worsening relations between the two countries.

Volatility looks here to stay

Of course, many commentators are now claiming that Trump may govern with different policies to those on which he campaigned. Whether that proves to be correct or not, in my opinion Trump’s Presidency will include significant change on taxation, spending and foreign policy. Therefore, I believe that the uncertainty seen in stock markets since the election is just the beginning of a period of highly volatile share price movements.

In the current ‘lame duck’ period, uncertainty may not rise beyond the levels seen since the election. Barack Obama is keen to ensure a smooth handover of power and Donald Trump is unlikely to make any controversial comments regarding his plan of action. After all, he can’t do anything in terms of policy-change until he becomes President in 2017.

However, beyond the point at which Donald Trump becomes President, I believe that volatility will increase significantly. His plan to reduce taxes on businesses and on individuals while at the same time increase infrastructure spending may bring rewards in terms of job creation and GDP growth. But it also means higher risk, since debt levels are likely to rise in order to fill the hole created by higher spending and lower tax receipts. This could lead to higher uncertainty regarding the US economy’s future and cause share prices to become more volatile.

A stable solution

In such volatile times, companies which offer a consistent, stable and robust outlook could become more popular among investors. That’s why I’m optimistic about GlaxoSmithKline’s future share price performance versus the wider index. Its sales and profitability are less dependent upon the performance of the wider economy than is the case for most companies. This provides GlaxoSmithKline with defensive characteristics which are further enhanced by its diverse business model.

Essentially, GlaxoSmithKline is three businesses in one. It has a consumer goods division which sells products such as Horlicks and therefore benefits from a significant amount of customer loyalty. GlaxoSmithKline also has a pharmaceuticals division and a vaccines division. It is therefore more dependent on the patent cycle than the business cycle. When combined with its consumer division’s customer loyalty, this makes GlaxoSmithKline a robust and reliable performer which could be seen as a means of diversifying away from an uncertain economic outlook.

Future potential

GlaxoSmithKline is much more than just a defensive stock. Its drug pipeline holds significant promise in my view. For example, it spent £3.1 billion on R&D in 2015 and expects to generate a 13% internal rate of return (IRR) on this investment. Over the course of 2016/17, GlaxoSmithKline expects up to 20 Phase II starts and up to 10 Phase III starts. Looking further ahead, it has the potential to file up to 20 assets by 2020, which indicates that its sales could rise substantially over the medium term.

This should help to boost GlaxoSmithKline’s dividend payments. They are being frozen for the next couple of years as GlaxoSmithKline seeks to improve its cash position. Even without dividend growth in the near term, GlaxoSmithKline still has income appeal. It currently yields 5.1% versus 3.7% for the FTSE 100. This will help GlaxoSmithKline to record a positive total return should capital gains be difficult to achieve in a potentially uncertain period for global stock markets.

Outlook

The US and global economies face a highly uncertain future. Although the next few weeks may prove to be a smooth transition, in 2017 I believe that the changes Donald Trump will seek to make to the US will cause share prices to become increasingly volatile. Although he may adopt a more conciliatory approach than he did during the campaign, Trump is likely to implement more radical policies than have been undertaken for a number of years. Even if they are successful in the long run, they are likely to cause investors to become increasingly risk-off in the short to medium term.

In such a situation, GlaxoSmithKline could gain in appeal. It has a well-diversified, stable business model which is not closely tied to the performance of the economy. It also has growth potential via its pipeline and offers a high yield which could appeal to defensive-minded investors. Therefore, in my opinion GlaxoSmithKline is an appealing investment following Trump’s unexpected election victory.