For the second time this year, global financial markets have been temporarily roiled by an unexpected outcome in a key ballot. After Britons' surprise vote in June to leave the EU, Americans took to the polls on Nov. 8 to elect Donald Trump the 45th president of the U.S.--a largely unforeseen result that had investors quickly selling off riskier assets and bidding up "safe haven" holdings, before reversing course.
Investor concern appears to be centered around the uncertainty of where President-elect Trump will take government policy. S&P Global Ratings economists have assessed the potential effects of his stated plans in such areas as fiscal policy, tax reform, and trade and immigration. In this light, our initial impression is that a Trump administration will, overall, have a mixed and mild impact on U.S. corporate credit.
Following the affirmation of our sovereign credit ratings on the U.S., here we discuss the possible effects on various U.S. corporate sectors from a credit perspective. We don't assume all campaign platform rhetoric will transform into government policy. Nonetheless, we believe that, on balance, some of the more realistic policy changes could be positive for corporate taxes (which would decline), coal-related activities, infrastructure, defense spending, and business regulation (of which there would be less), but possibly negative for sectors that are more dependent on trade and immigration. (See Chart 1.)
We foresee the possibility of a high and slightly negative impact on the auto sector. We anticipate moderate effects on aerospace and defense; consumer goods; healthcare services; leisure; media, telecommunications and cable; metals and mining; midstream energy; pharmaceuticals; regulated utilities; retail; technology; transportation; and unregulated power. We expect a low impact in building materials; capital goods; chemicals; forest products; homebuilders; oil and gas; and REITs.
The more pertinent issues we see recurring across sectors are:
- Trade/tariffs and the global supply chain, where we expect a negative effect on the autos, capital goods, retail and transportation sectors, and slightly positive effects on metals and mining.
- Tax reform and possible increased repatriation of cash, which should be positive unless funds are redeployed as shareholder rewards.
- Immigration policy, where we expect negative effects on homebuilders, leisure companies, and retailers.
- The Supreme Court's ruling on the Environmental Protection Agency's Clean Power Plan (CPP), where we expect positive effects on metals and mining, and midstream energy; mixed effects on unregulated power producers; and neutral effects on regulated utilities.
Expected Effects By Sector (Alphabetically)
Aerospace and Defense
Moderate, slightly positive effects. President-elect Trump supports higher defense spending but also wants to withdraw from certain international commitments. In this light, the effects are difficult to determine, but likely positive--although there's less information on funding for specific weapons programs. Higher defense spending would likely result in improving credit metrics, but shifts in spending priorities could hurt specific companies. Commercial aerospace could suffer if there are significant changes to international trade agreements that affect the costs of importing components, or the administration implements other policies that curb global air travel.
High, negative effects. We see autos as the only industry facing a high and negative impact from policies the new administration may adopt. President-elect Trump has vowed, in his first 100 days, to renegotiate the North American Free Trade Agreement (NAFTA), which would have a clear effect on the sector's supply chain. Changes to the agreement could weigh heavily on long-term profitability for automakers that plan to shift small-car production to Mexico, and others that want to use Mexico as a production hub for emerging markets. Higher tariffs could raise costs, hurt profit margins, and worsen credit metrics. To the extent such renegotiation leads to uncertainty, it may create downside risks for some ratings and outlooks in the sector.
Low, slightly positive effects. Further tightening of labor conditions amid a crackdown on undocumented immigrants could slow home construction, but some experts feel most of this effect has already been absorbed. Increased spending on infrastructure would be a boon to cement and aggregates producers. The largest effects could involve a change in corporate taxes, freeing up cash flow for other investments. However, it's not likely to have an effect that would change the industry outlook or business conditions.
Low, mixed/uncertain effects. Potential negative effects could come from trade and tariff renegotiations that disrupt the sector's supply-chain/trade relationships, given the multinational and sometimes complex supply chains companies operate with. There could be modestly worse business conditions on the trade side, but those could be offset by a potential increase in infrastructure spending, some repatriation of funds, or an increases in defense spending.
Low, slightly positive effects. We think there could be a modest benefit to industry outlooks from lower tax rates. Many of the larger chemical companies have global operations and generate cash overseas, so any reduction in the cost to repatriate cash would be a modest benefit--albeit for a relatively small number of companies. Meanwhile, higher tariffs that resulted in lower levels of imports or higher-priced goods from China could boost domestic prices for some subsectors, such as nitrogen fertilizers, benefitting U.S. producers.
Moderate, uncertain effects. The biggest potential negative effects could result from changes in trade policy that cause trade wars and drive up costs. In addition, multinationals in these sectors depend on emerging markets for growth. Some currencies in these countries have already been hit hard, and volatility has increased since the election--which could further weaken these economies, resulting in lower demand. The beverages and tobacco sectors could be hurt if federal and state governments change excise taxes for tobacco and/or initiate sugar taxes. We haven't heard the president-elect address this as a campaign theme, but, historically, changes have occurred after elections. The sectors could benefit from increased consumer spending if the president-elect's increases in spending and lower taxes result in faster economic growth in the U.S. A lower corporate tax rate and a repatriation tax holiday would improve cash flows. We believe that if companies were able to bring back cash currently overseas they would use the funds primarily to repay debt and make acquisitions.
Low, slightly positive effects. U.S. companies export timber, lumber, and newsprint, so more-favorable trade agreements might be a positive. The largest effects could come from any substantial change in corporate tax rates.
Health Care Services
Moderate, negative effects. A central component of President-elect Trump's stated health care policy is his desire to repeal the Affordable Care Act (ACA), which we see as difficult to do. Instead, we believe a more realistic scenario might be a fairly substantive revision to the program. We think possible revisions could include narrowing the scope of the law by lowering coverage levels, reducing subsidy funding levels provided to subsidy-eligible enrollees, removing the individual mandate, or changing the eligibility threshold for subsidy eligibility. However, we believe the president-elect's stated policy preferences will likely result in lower insurance coverage relative to our prior expectations, notwithstanding our belief that a full repeal may be difficult, given the political repercussions of withdrawing coverage for 20 million Americans. In our view, most at risk is the hospital subsector. Still, just as the initial positive impact in 2014 was relatively modest (many public for-profit hospital operators estimated a mid-single-digit positive impact to EBITDA), we would expect the downside impact of a repeal to be relatively modest as well.
Low, neutral effects. The home construction force has shrunk not just because of declines in immigrant labor but a shift to steadier and better-paying industries. Increased labor costs have already put a dent in profit margins.
Moderate, uncertain effects. If the new administration's immigration policies are severely restrictive, this could drive up the cost of labor in the sector and pressure margins. In addition, the leisure sector is highly sensitive to economic growth and the health of consumer spending, so any meaningful changes in trade or fiscal stimulus policies that either increase or decrease forecast economic growth would impact revenue and EBITDA trends for many companies in the industry.
Media, Telecommunications, Cable
Moderate, uncertain effects. President-elect Trump's positions on important media and telecommunications issues aren't clear, as he has made few, if any, statements regarding regulation of the industries. However, we believe the media and telecom sectors could benefit if he were to pursue traditionally Republican initiatives such as looser regulation, and support for mergers and acquisitions (M&A). More than likely, a Republican-led Federal Communications Commission (FCC) would roll back most of the regulatory initiatives enacted by current Democratic Chairman Thomas Wheeler, including net neutrality (Title II regulation), privacy, set-top-box reform, and special-access reform. A loosening of regulation over the cable and broadband service providers would reduce longer-term risks, although we don't expect this to materially affect credit ratings. In addition, we believe a Trump-led FCC could relax regulations around media ownership, including loosening the 39% TV-broadcast ownership cap and revising cross-media ownership rules. These changes would benefit the local television broadcasters and could lead to further industry consolidation. All told, we believe a Trump presidency could be more supportive of consolidation. If consolidation in the wireless sector were approved, credit metrics would weaken in the near-term, although this would be limited to only a few issuers. Longer term, we believe consolidation in the wireless sector would create healthier industry dynamics.
Metals and Mining
Moderate, slightly positive effects. The new administration's policies could be favorable for the coal and steel sectors. As the nomination process for the empty Supreme Court seat will likely resume, the court is scheduled to hear the case on the CPP, which principally affects coal-burning power plants. As coal companies restructure--and if they benefit from the elimination of the CPP--they could enjoy stronger credit metrics. Steel and aluminum companies could also benefit from lower imports and resulting higher selling prices.
Moderate, slightly positive effects. The new administration would likely adopt policies that would expand pipeline development and other industry-friendly policies that would open federal lands to encourage more drilling for gas and oil. Credit metrics in the sector could strengthen, although not so substantially as to cause significant ratings movement, in our view.
Oil and Gas
Low, neutral effects. President-elect Trump's plan focuses on energy independence, which could bolster the coal industry and aid drillers. We would expect a Trump administration could allow drilling in some federally protected areas (onshore and offshore). We believe the new administration would support any type of fossil-fuel initiative that would create jobs. The new president could also relax air-quality standards, benefiting coal producers and potentially affecting coal's competing fuel, which is natural gas. With respect to credit, we believe any benefit would be nominal and wouldn't lead to any positive ratings actions.
Moderate, slightly positive effects. President-elect Trump appears to be less focused on a price-control agenda than his opponent was, but has offered only vague comments on pharmaceutical pricing. He has spoken in general terms about greater scrutiny over drug prices and of importing less-expensive drugs. The potential for a tax repatriation holiday would likely benefit pharmaceutical companies with substantial offshore cash balances. While the effect of the election on pharma may be somewhat positive, our ratings outlook on this sector remains negative, which primarily reflects the hearty appetite for M&A among borrowers we rate. We believe this could result in negative rating actions in the near term.
Moderate, slightly positive effects. The credit metrics of borrowers in the sector could strengthen slightly under the new administration. The fate of the CPP would affect only the pace of coal-fired power plant closures, as utilities regard coal as a poor investment that wouldn't resume even in the absence of the CPP. The CPP's demise would, however, lower the risk of coal-based assets being stranded, and therefore modestly ease pressure on regulatory risk and ratings. The stable outlook on the industry is unlikely to change solely from the election results.
Low, neutral effects. Tax reform would be a significant and direct issue in the sector if it included changes to REIT treatment, but we don't anticipate this to be the case. Changes to the deductibility of mortgage interest could influence multifamily rental sectors. Health care REITs could be affected by changes to the ACA and reimbursement rates for tenants.
Moderate, neutral effects. We don't think it's likely we'll see a change in credit metrics directly related to the election, if the economy continues to expand. Sharp rises in minimum wages, all else being equal, would pressure margins for some retailers and restaurants in the moderate term. Sharply higher tariffs on goods imported from large retail supply bases could also weigh on margins. A significant shift in immigration policy bears watching if it reduces the pool of eligible workers for some retail segments. A few higher-rated issuers are holding some cash overseas, so it would be a modest positive if they could bring it home at a low tax rate.
Moderate, neutral effects. Despite the sector's moderating organic operating growth, increasing debt-financed acquisition spending, and potential for cash repatriation, tech company outlooks remain generally stable. This is thanks to large surplus cash balances and financial policies that aim to avoid protracted, significant leverage increases. Corporate-tax reform could accelerate cash repatriation--with some companies deploying a portion of the funds toward dividends and share purchases, which could weaken net leverage metrics. We see potential U.S.-China trade reform as a risk to the operating profitability of the hardware sector because of the growing prevalence and infrastructure of Chinese contract manufacturers. Business conditions and ratings aren't likely to be materially affected.
Moderate, negative effects. It's unlikely that the new administration would have widespread effects on ratings or industry outlooks. That said, any rating impact would most likely be on companies specifically affected by global trade. A Trump administration could ease pressures on the phasing out of coal, benefiting railroads. A downside risk is that any potential trade war could hurt container leasing, chassis leasing at ports, package express companies, and selected railroads with substantial Mexico exposure.
Moderate, mixed effects. The election outcome isn't likely to benefit coal-fired generators in the short term, as they're facing commodity headwinds. But it could have benefits in the longer term if the CPP is either not enforced or the Supreme Court tilts away from the EPA. The effects on renewable energy are likely to be muted for now; these have benefited from extensions of legislated tax credits (which have enjoyed bipartisan support) and renewable-portfolio standards at the state level--neither of which seems in immediate jeopardy of being changed. While renewables aren't likely to be interrupted in the near term due to improving economics, renewable standards, and tax credits, in the longer term the absence of a CPP means fewer incentives, and if there is a lower corporate tax rate, tax incentives for renewables could be less valuable.
Time Will Tell
For all sectors, the above views are predicated on the view that the president-elect would push to implement his proposed policies. However, the need to balance competing demands from stakeholders and the views of Congress could well result in such policies being amended, added to, abandoned, or delayed.