President Trump's 100-Day Scorecard

Neil Dwane | 04/28/2017
washington white house

Summary

When he took office, President Trump clearly outlined his policy priorities for the first 100 days. Now that this milestone has been reached, we took a look at the progress he’s made.

Key takeaways

  • 100 days in, expectations have collided with political reality. While Mr Trump’s vision is still in place, his progress is likely to be slow.
  • This includes key market-friendly aspects of Trumponomics such as tax reform and infrastructure spending, where Congressional support will be vital.

President Donald Trump came into office amid high expectations that were set by his own forceful campaign pledges. The financial markets expressed their high hopes in the form of higher share prices, buoyed by the prospect of tax cuts and other business-friendly measures from the new president.

Soon enough, however, Mr Trump began facing significant challenges, starting with a combative Congress that couldn’t muster the votes for his proposed repeal of Obamacare. With its defeat, Mr Trump had discovered what many leaders before him had already learned: Progress can be slow when political reality sets in.

Mr Trump is now at the 100-day mark of his presidency, and while it is unrealistic to expect him to have succeeded on every dimension of his programme in just over three months, this has long been a milestone for assessing a new president’s progress.

With that in mind, our scorecard provides our best assessment of Mr Trump’s accomplishments in the key policy areas he has spelled out in his ambitious agenda.

President Trump’s 100-Day Scorecard

Mr Trump came into office with a bold vision and scored at least one quick win, but many of his proposed policies have made only incremental progress since then. Congressional support seems to hold the key to success for many of Mr Trump’s initiatives; without it, his ability to advance his agenda may be limited.

   
  1. No Progress
  2. In Progress
  3. Complete
Commentary
Make America Great Again Build a Wall
Executive action signed; supplementary border barriers are likely
Restrict Immigration
Policy affected by US judiciary
Increase Infrastructure
Congress unlikely to commit to major spending program
Increase Defence
Proposition to swell defence budget by USD 52 billion
"Drain the Swamp" and Reduce Political Influencers
Congress and Republicans gridlocked
Trade Withdraw from TPP
Executive action signed
Renegotiate NAFTA
Mr Trump recently softened his position on NAFTA, agreeing to negotiate instead of terminate
China "Fair Trade"
Awaiting assessment report from the US Department of Commerce
BAT or other Tax-Increase idea
Congress cooling on BAT
Trumponomics Reduce Personal tax
New proposal cuts tax rates but also limits some popular deductions
Reduce Corporate tax
Big cuts in business-income tax should boost corporate earnings
Repatriate cash
Unlikely to stimulate the economy
Deregulation Dodd-Frank Simplification
Expectations of deregulation too high
Return of Glass-Steagall?
Reinstatement called for by both Democratic and Republican parties
FDA Improvements
Scott Gottlieb picked for commissioner
Obamacare Improvements
Prioritizing Obamacare now a policy mistake
Financials Change Composition of FOMC
To come in 2018
Deliver New 2017 – 2018 Budget
Preliminary budget delivered, covering only discretionary spending
Unfunded “Tax Cuts”?
Unlikely from a conservative Congress

Investment implications

  • The markets’ expectations for “Trumpflation” should be lower
  • Mr Trump’s 3-4 per cent sustainable growth pledge may be tough to attain; much depends on labour force growth and productivity growth
  • If Mr Trump successfully reduces regulations, financial services could benefit; less so the energy sector
  • Overall, progress will be slower and take longer than many anticipate


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Expert-Image

Neil Dwane

linkedIn
Global Strategist
London
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.

5 Reasons to Expect Higher Oil Prices

Neil Dwane | 05/30/2017
5 Reasons to Expect Higher Oil Prices

Summary

Despite a recent bout of plunging prices, Neil Dwane says the oil market should grind higher on solid global demand, renewed supply constraints and still-significant underinvestment. All of which builds a clear case for investing in the energy sector.

Key Takeaways

  • Investors should expect to see higher oil prices in the medium to long term as inventories are reduced.
  • Among the primary reasons for higher prices: Major oil producers just agreed to extend production cuts, in part because many petro-states are growing more fragile; improving global growth should boost demand; and new oil discoveries have become increasingly rare.
  • Higher prices are good for energy investors but have a downside: They can push inflation higher and act as a tax on economic activity.
  • Investing in the energy sector still offers both attractive equity income and capital return opportunities, but risk management is paramount.

Why we're constructive on oil

Allianz Global Investors has held a constructive view of the oil industry for the past 12-18 months

Not many investors have been bullish on the price of oil recently, but Allianz Global Investors has had a constructive view of the industry for the past 12-18 months. Now that both members and non-members of the Organization of the Petroleum Exporting Countries (OPEC) have renewed their commitment to limit production in an attempt to boost prices, it's a good time to review the prospects for oil. Here are five reasons why we think the price of oil will turn around – and why investors should consider positioning themselves to take advantage of the opportunity.

1. Global demand for oil is reassuringly stable

 Although the International Energy Agency (IEA) lowered its predictions for oil-demand growth in 2017 from 1.4 million barrels per day to 1.3 million, global demand has remained reassuringly stable. At the end of 2016, the world consumed slightly more than 97 million barrels per day, making the IEA's modest downward revision look relatively inconsequential and still representative of healthy growth. At the same time, oil inventories have been decreasing and global economic growth is buoyant. Taken together, these factors should underpin a steady demand for oil despite higher prices.

It is important to note that a rising oil price has a downside as well, given that it functions as a tax on consumers and the global economy in general. Higher prices may crimp consumer spending and drive inflation through the economy. This effect can be amplified by currency movements globally, particularly given that oil is often priced in US dollars. For example, the post-Brexit fall in the British pound had the effect of re-pricing oil to the equivalent of $70 per barrel by the time it reached consumers at the pump.

Energy production growth is slowing

Percentage of energy production (million tons of oil equivalent) growth per decade



2. Multiple factors will constrain the oil supply

Oil inventories have been decreasing while global economic growth is buoyant

Global supply levels became much more difficult to assess in November 2016, when members and non-members of OPEC agreed to reduce production as a way to drain the oversupply of oil and boost prices. On May 25, this agreement was extended through March 2018. While analysing the actual effectiveness of this agreement will continue to be challenging, there is little doubt that it has improved the supply/demand balance.

Moreover, many OPEC nations are effectively petro-states that derive most of their government financing through the taxation of oil and gas revenue. When the price of oil is threatened, their institutions become vulnerable – and given that oil prices have been low for some time, many of these countries have experienced serious issues:

  • Mexico, already under pressure from the trade and immigration policies of President Donald Trump, has seen its revenues and financial flexibility drop sharply as production and profits fall.
  • Venezuela, which produces around two million barrels of oil per day, has struggled with hyperinflation and appears on the verge of collapse as its economy runs out of cash, credit and food.
  • Nigeria is suffering not only from a weak, inflation-prone currency and economy, but from serious security problems in its oil-producing delta regions.
  • Oil production across the Middle East is also being threatened by continuing destabilization in countries such as Libya and Iraq – which may get worse before it gets better.

The fragile state of many petro-states is one of the reasons why OPEC is aiming to boost prices by cutting production. These issues have also ratcheted up geopolitical tensions – already at an elevated level thanks to US airstrikes on Syria and missile testing in North Korea. If markets become increasingly nervous, we expect to see a further premium on prices.

The supply/demand imbalance may be shifting

World oil supply/demand in millions of barrels per day



3. New discoveries are dwindling

For decades now, discovering new oil fields has grown increasingly difficult. As a result, the global economy is essentially relying on a few old and aging mega-fields to produce the supply of oil it needs. In fact, aside from the US shale-oil industry, which has made significant advances in recent years, few energy companies have been investing more in finding new oil fields. Many companies also enacted significant capital-expenditure cuts in 2015-2016, which meant they had even less to spend on oil discovery. They have instead focused on cost control and cash generation. If this capital discipline remains in place, and if the price of oil stays stable, shares of energy companies could move higher – particularly given that a fluctuating oil price helped keep valuations quite low for years.

OPEC recently extended an agreement to reduce production as a way to drain the oversupply of oil and boost prices  

Some energy companies have prioritized "brownfield" developments that attempt to eke out more production from existing fields using cost-effective technologies. These efforts can help companies achieve quick cash-flow boosts, but the stock of these fields is increasingly limited. Indeed, a recent study from Rystad Energy suggests that, across the industry, reserve-replacement ratios have fallen to their lowest level in 70 years. While there may be no immediate impact, the effects of this fall in volumes could be felt on global supply over the long term. This figure is unlikely to pick up if there is no major investment increase.

In our view, this cutback in oil discoveries will start to filter through by 2019 and will noticeably reduce supply. For investors, it means the market could be looking at another oil-price spike not too far in the future.

4. The US shale industry has problems

In recent years, new technologies and drilling techniques contributed to a US shale-oil boom that significantly boosted supply and helped drive down oil prices. When OPEC nations restricted their oil production late last year,  largely in an effort to combat low prices, US shale producers seized the opportunity to ramp up their output and exports. This further altered the balance of supply and demand in the global oil market.

Aside from the US shale-oil industry, few energy companies have been investing in finding new oil fields

Shale oil is a clearly profitable source of production for US energy companies, but it is important to note that the US is still a net importer of oil and other petroleum products. Moreover, the US shale-oil industry as a whole is grappling with some significant issues:

  • Many US oil producers are still cash-flow negative, relying on funding from banks and investors to provide enough cash to stay in business.
  • The robust pace at which drilling activity has increased over the past year is bound to decelerate due to growing constraints on available personnel and equipment.
  • As quickly as the shale boom started in 2012, the industry suffered a sudden recession in 2014. Consequently, much of the talent, skills and capacity used in the previous boom are now gone. So even though today's production levels are high, today's unsustainably low costs are beginning to increase rapidly.

President Trump is certainly looking to support US domestic production and is less environmentally focused than his predecessor, but it is unlikely his policies will have much impact on the location and pace of US drilling. For investment and employment to rise, the US shale industry needs higher and more stable prices. The general breakeven point is estimated to be in the $45-50 per barrel range – but only for the premier acreage. That leaves the large number of less productive fields more vulnerable.

5. Domestic production is falling in a booming Asia

Elsewhere in the world, China's domestic production is also in decline, and additional falls are expected. At the same time, China's energy demands are growing along with its population size. This suggests that China will increasingly continue to rely on the global markets to add to its supply. In addition, India, Indonesia and other Asian nations are also seeing production declines even as regional economic growth is expected to move significantly higher overall. This should lead to increasing demand from the global markets.

The impending IPO of Saudi Aramco is expected to be valued as one of the top 10 companies in the world

Today's low prices make oil an attractive opportunity for investors On May 15, Saudi Arabia and Russia announced an agreement to extend production cuts through March 2018 in an attempt to get surplus inventories under control. After this announcement, oil prices rose more than 3%, to $52.52 per barrel. Only 10 days later, OPEC and non-OPEC nations agreed to extend their arrangement to cut production, and we shall see if the price of oil responds accordingly over time.

Eventually, of course, these OPEC restrictions will be unwound once inventories are reduced to normal levels, which should result in a more natural supply/demand balance. And as we have discussed, geopolitical tensions alongside a lack of exploration and new project sanctions appear set to reduce supply globally. This combination of factors should lead to historically low global spare capacity, which could lay the foundations for an oil-price spike.

We also expect to see excitement in the marketplace surrounding the impending initial public offering of Saudi Aramco, which is expected to be valued as one of the top 10 companies in the world. This could have a halo effect on the markets.

In recent months, the oil price has been depressed because the market did not see the quick inventory declines it was looking for; as a result, speculative long positions contracted. We believe this happened at least in part because of a lack of good data about global inventories, which meant the markets focused only on US numbers. Either way, inventories would normally be building during this period due to seasonality, and instead they are falling. We believe this contributes to an attractive longer-term opportunity for investors.

105007
Expert-Image

Neil Dwane

linkedIn
Global Strategist
London
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.
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