Learning Political Lessons from US Healthcare

Weekly Investment View – 26 March 2017

Following the market overview (covering the run-up to and aftermath of last week’s failed US healthcare vote), we look at the G20 trade talks, recent US healthcare developments, the Asset Allocation Committee increase in the MENA equities overweight, followed by the Investment Summary, containing more detail on policy, and why last week’s US healthcare result changes little.

The S&P 500 closed only 1.4% lower over the week, despite the US House of Representatives vote on healthcare reform being cancelled last Friday, after it had been delayed the previous day once it became clear that lobbying in its favour was not working. Some nervousness had become evident earlier in the week as doubts began to emerge about the success of the vote, and therefore about the prospects for the passing of the Trump Administration’s other plans (principally adjusting the tax code, and increased infrastructure spending), in addition to the relaxing of the regulatory environment, the latter of which is designed to especially encourage banks to lend to corporates. Last Wednesday was the first time in about 150 days that the S&P500 closed more than 1% lower, and many market participants pointed to this as the start of a correction, with a few saying it was the end for ‘Trumpflation’ stimulatory policies, based on the view that other measures being brought in by the new Administration could suffer a similar fate to their amended healthcare Act. Many healthcare stocks bounced strongly on Friday. The S&P500 is ahead by 5.1% for the year-to-date, (and by 9.6% since the election), and the NASDAQ 100 (better representing technology stocks than the NASDAQ Composite) is up 10.3% for the year-to-date. The EuroSTOXX 600 index was down 0.4% over the week, with Japan’s TOPIX matching the S&P, down 1.4%. Economic data released late in the week added to evidence that the eurozone is performing quite well, at least relative to its own experience over recent years, with Germany and France in the vanguard, and this helped the euro during a week when the dollar was still suffering slightly from the ‘dovish hike’ rate hike from the Fed the previous week. Although the eurozone’s continuing structural problems will come back to the fore sooner or later, the markets were in the short-term happy to see Marine Le Pen perform poorly in a televised election debate, with Mr Macron doing very well. Gold rose by 1.2% over the week, closing at $1,243, partly reflecting the 0.7% fall in the dollar index, and still below strong resistance located at $1,260-64. Given the ‘gradual rate of normalisation’ message from the Fed the previous week, futures markets were pricing-in a 13.3% hike probability for May, rising to 50.2% for June, according to Bloomberg (and 76.1% for September). The yield on the US 10-Year Treasury bond fell by 9 basis points over the week, reflecting a move away from ‘risk-on’, while the 2-Year yield fell by 6 basis points. Lastly, the UK is set to trigger Article 50 this Wednesday, which we will cover in some detail in next week’s report.

“Worries about global trade are probably over-stated”

At the beginning of the week the basics of the weekend’s G20 talks on trade were published on the wires, with Bloomberg saying that Steve Mnuchin, according to Germany’s finance chief Wolfgang Schäuble, appeared to have “no mandate” to settle his country’s position on free trade and protectionism. Other delegates found Mnuchin positive, and rather more fairly commented that he was still familiarising himself with what his job entails. Of course he has only been in the role a matter of weeks and must still be arriving at his own conclusions - which must then be discussed with President Trump and the senior members of the Administration. So it is a bit too early to expect defined positions on trade, further than what the new representatives of the US have already said i.e. that it has to be ‘fair’. So at the G20 talks the US was unable to clearly support free trade, leading to a watered-down joint communique to the effect that members were ‘working to strengthen the contribution of trade to our economies’. As one commentator (from UBS) reminds us, the preoccupation with physical trade doesn’t adequately take into account the US’s surplus in services.

The Trump Administration has just received a profound lesson in real-world US politics. The fact that the Republicans have not voted as a block means that the Affordable Care Act (‘Obamacare’) may have to remain in place for some time. It is said that Trump himself had questioned the wisdom of tackling healthcare first, and it looks as though that instinct was correct; his attitude towards it now will be ‘just watch this thing go further wrong’, leading to an almost inevitable ‘told you so’. The Trump Administration had promised that after health-care reform, tax reform would follow, and by August, and it looks as though investors are naturally placing far greater importance on taxes, regulatory reform, and infrastructure spending. The House of Representatives’ conservative Freedom Caucus had threatened to vote against the new proposals without significant changes to it. Although a short-term factor, we have taken it as a bullish divergence that US equities avoided a major sell-off on Friday after the vote pulling was made known (pulling the vote was better than losing it). Paul Ryan spoke well after the event, and he and the Trump Administration will now as stated move on to tax reform, for which there should be much greater agreement.

“The Republican’s American Healthcare Act has been a huge lesson for them”

In terms of getting Republican policies passed, from this point there should be benefits from the fact that for the first time in 11 years, the Republicans control the presidency and both chambers of Congress (there are 44 more Republicans than Democrats in the House of Representatives). The Freedom Caucus is composed of 29 members, and will admittedly have to be well managed in future by the Administration and Speaker Ryan. The conservatives had felt the new American Healthcare Act had not gone far enough, whereas moderates were afraid the new legislation would leave too many of their constituents without medical insurance cover. The Republican replacement for the Affordable Care Act sought to save money by winding down the its expansion of Medicaid and capping its subsidies. This would have adversely impacted revenue for doctors, hospitals, and medical insurance providers. Republican conservatives wanted an even more complete re-working, with moderates apparently shocked when the Congressional Budget Office estimated the proposed plan would leave 24 million more Americans without health insurance by 2026. In conclusion, we believe the subject of US healthcare reform to be hugely emotive and contentious – and that fiscal and regulatory policy changes are very unlikely to suffer the same fate. Sean Spicer, White House Press Secretary, is almost certainly correct when he said last week, "There's a huge appetite for tax reform”, - and we continue to believe the roll-out of such policies will be bullish for US equities, with knock-on effects elsewhere.

The NBAD Asset Allocation Committee met last week, and decided to leave investment policy unchanged, with the exception of a decision to slightly increase the overweight position in MENA equities across the model portfolios. It was thought that the weakness in oil prices towards $47/barrel (WTI), down from $54 on 21st March represented an opportunity to add to this asset class for the medium term. On a country basis, the recommended overweight positions are currently the UAE, Kuwait, and Oman (with a ‘neutral’ weight in Saudi Arabia). In the UAE, ‘dividend season’ is over (with stocks having gone ex-dividend), the markets have corrected, and the MSCI UAE Index is trading at a P/E ratio of 10.4x 2018 earnings (down from 11.6x for the current year), and based on 11.73% estimated earnings growth next year. Favoured sectors are the Banks, based on their attractive valuations, the likelihood that provisions have normalised, plus the improvement in net interest margins to come, and Real Estate, especially after the recent correction. In Kuwait, valuations remain attractive, whilst the expected increase in the weight of Kuwait in the MSCI FM index could drive further inflows, with our preferred sectors being Banking and Telecoms. Within the overall neutral stance for Saudi equities, the recommended approach is to overweight selected National Transformation Plan beneficiaries, principally in Real estate and Healthcare. Real estate is progressing at a faster pace than expected, while in Healthcare the receivables issue with the government is expected to be resolved in tranches. The correct stance in Saudi banks is probably to be underweight, given that provisions have begun to rise. On a more positive note for Saudi equities generally, the market is moving to ‘T+2’ settlement, while the criteria for MSCI EM index inclusion should be met in due course.

“As Warren Buffet says, “The US has the secret sauce”

INVESTMENT SUMMARY: Developed equity markets may still see the 4-5% correction that we have been discussing since the publication of the NBAD Global Investment Outlook 2017 in January. Markets have needed, and would be well served by, such a technical correction. So many are now calling for this that it may not actually happen. US equity market action late on Friday was not the immediate downside that some scaremongers had called for, consistent with ‘end of Trumpflation’ warnings. Readers will be aware that the Asset Allocation Committee (AA) had already reduced the overweight position in developed market equities on a tactical basis. The AA Committee met ahead of the initially postponed vote last Thursday, and briefly discussed the option of going to neutral – but decided against doing so. By this point it looked as though repealing Obamacare would fail, but the Committee does not think it’s ‘the end’ for the Trump Administration or their policies. The failure of this legislation is certainly painful for the Administration, without any doubt – but we do not regard it as a disaster. We would reiterate that healthcare, especially in the US, is very emotive and highly politicised – whereas US tax reform in the manner likely is arguably not – and should succeed. As Warren Buffet recently said, it’s not just about Trump, it’s about the evidence (as he sees it) that the US has ‘the secret sauce’.

“We still believe in the ability of the Trump Administration to succeed”

Although President Trump’s policy initiatives are important, they are actually not the ‘be-all and end-all’ for global equity markets. The world’s largest SWFs had already made major investment policy decisions to gradually increase weightings in equities relative to bonds, probably predicated as much on an eventual end to the multi-decade bull market in bonds and historically very low bonds yields vs. equity market yields. We are not yet calling the end of the bull market in global bonds; rather, as we have argued, these continue to be in a broad trading range, still characterised by a range in the US Treasury 10-Year yield of between 2.30-2.65%, resulting in trading opportunities that we have taken advantage of in recent months.

For any inquiries related to this article, please contact Alain Marckus or Clint Dove.

Click here to download the article in PDF

Weekly Investment View – 26 March 2017

This report has been prepared and issued by the Global Asset Management (“GAM”) of the National Bank of Abu Dhabi PJSC (“NBAD”) outlining particular services provided by GAM and does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase or subscribe for, any shares in NBAD or otherwise or a recommendation for a particular person to enter into any transaction or to adopt any strategy nor shall it or any part of it form the basis of or be relied on in connection with any contract therefore. This report was prepared exclusively for the benefit and internal use of NBAD. This report is incomplete without reference to, and should be viewed solely in conjunction with the associated oral briefing provided by GAM. The report is proprie-tary to GAM and may not be disclosed to any third party or used for any other purpose without the prior written consent of GAM. The information in this report reflects prevailing conditions and our views as of this date, which are accordingly subject to change. In preparing this report, we have relied upon and assumed, without independent verification, the accuracy and completeness of all the information available from public sources or which was otherwise reviewed by us. In addition, our analysis are not and do not purport to be appraisals of the assets, stock or business of the recipient. Even when this presentation contains a kind of appraisal, it should be considered preliminary, suitable only for the purpose described herein and not be disclosed or otherwise used without the prior written consent of GAM. NBAD clients may already hold positions in the assets subject to this report and may accordingly benefit from the buying or selling of such assets as referred to in this report. This document does not purport to set out any advice, recommendation or representation on the suitability of any in-vestment, transaction or product (as referred to in this document or otherwise), for potential purchasers. Potential purchasers should determine for themselves the relevance of the information contained in this document and the decision to purchase any investment contained herein should be based on such investigation and analysis as they themselves deem necessary. Before entering into any transaction potential purchasers should ensure that they fully understand the poten-tial risks and rewards of that transaction (including, without limitation, all financial, legal, regulatory, tax and accounting consequences of entering into the transaction and an understanding as to how the transaction will perform under changing conditions) and that they independently determine that the transac-tion is appropriate for them given their objectives, experience, financial and operational resources and other relevant circumstances. Potential purchasers should consider consulting with such advisers and experts as they deem necessary to assist them in making these determinations and should not rely on NBAD for such purposes. NBAD is acting solely in the capacity of a potential arm’s-length contractual counterparty and not as a financial adviser or fiduciary in any transaction unless we have otherwise expressly agreed so to act in writing. NBAD does not provide any accounting, tax, regulatory or legal advice. NBAD is licensed by the Central Bank of the UAE.


NBAD London Branch is Authorized by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from NBAD London branch on request. Registered in England & Wales: Company No: FC009142: VAT No: GB245 3301 91.


NBAD Paris Branch is licensed by the French Prudential Control Authority as a credit institution. NBAD Paris is registered in France under the company number: RCS Paris B 314 939 547.


This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are currently as of the date of this report, and are subject to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. At any time the National Bank of Abu Dhabi PJSC and/or NBAD Private Bank (Suisse) SA may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issu-er. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. National Bank of Abu Dhabi PJSC expressly prohibits the distribution and transfer of this document to third parties for any reason. National Bank of Abu Dhabi PJSC and/or NBAD Private Bank (Suisse) SA will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distribution only under such circumstances as may be permitted by applicable law. The “Directives on the Independence of Financial Research”, issued by the Board of Directors of the Swiss Bankers Association (SBA) do not apply.