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With the 2018 midterm elections around the corner, I spoke with Ben Phillips about the impact of policy on the investment world.

Ben Phillips serves as the CIO of EventShares, overseeing research and portfolio management for the U.S. Policy Alpha ETF (PLCY). Mr. Phillips previously worked for Goldman Sachs Asset Management, where he had portfolio management responsibilities across several multi-sector total return funds. Prior to GSAM, he held senior investing roles at Providence Equity Partners and Lord Abbett. Mr. Phillips is a CFA charterholder and received an MBA and BSBA in Finance from the University of Missouri. Mr. Phillips works in the firm’s New York office.

Background:

• How do you think about investing at Eventshares? (What is the effect of Policy on the markets)
• Government affects everything.  How do you break this down and organize your thinking?
• Once your themes are established how do you implement your findings into good investment ideas?

Onto the 2018-2019 political environment:

First, what do we make of the general political environment and the effect of Trump?

Second, what is the current thinking on the midterms?

Onto the specific policy themes that affect investments:

Policy themes outlined by Ben:

• Trade: “Trade continues to be the biggest potential headwind to the market. We expect headline volatility to linger, as markets attempt to decipher if Trump is bluffing on tariffs. While negotiations play out, we prefer to hold U.S. focused companies with minimal foreign currency exposure.”
• Immigration: “Border arrests trended down in 2017 after Trump assumed office pledging an immigration crackdown. However, 2018 border arrests are increasing as the administration doubles down on its agenda and strengthens border enforcement. We expect this to impact U.S.-Mexico relations and be a defining issue in the midterm elections.”
• Trucking: “Electronic logging devices (ELDs) continue to be implemented, which we believe will slow trucker productivity. In our view, ELDs are compounding a driver shortage, which will force trucking companies to increase compensation and turn down freight. We prefer to own asset-light companies with exposure to the spot freight market, as well as companies involved in the intermodal and rail markets.”
• Defense: “The FY 2019 appropriations process is underway in Washington D.C. We continue to expect companies involved in the defense industry to grow their revenues over the upcoming years due to the long lead time of defense contracts and the added tailwind from foreign demand. In our view, aircraft manufacturers and shipbuilders are best positioned to benefit from increased spending.”
• Refining Spreads: “The U.S. energy boom continues to redefine the energy market. Drilling companies in the Permian Basin are extracting record amounts of oil, but pipeline capacity issues mean not all of it is moving out of the area. Trucking shortages (see above) are exacerbating the issue, causing some drillers to sell at the local Midland spot price to refining companies. The refining companies may then be able to capture the spread by selling the oil at WTI or Brent benchmark prices.”
• Financial Deregulation: “The Trump administration continues to focus efforts on dismantling the Consumer Financial Protection Bureau (CFPB), which is responsible for consumer protection in the financial sector. In our view, this will continue to benefit specialty finance companies, non-traditional lenders, and select regional banks.”
• Healthcare:
  • “The Affordable Care Act (ACA) continues to be a long-tail policy. After years of fighting the ACA, Republicans appear slightly more willing to expand Medicaid and Medicare, but only under their terms. While risk reduction payments were recently in the headlines after a New Mexico court ruling, we don’t believe they will be stopped under the ACA. In our view, these two items will help stabilize the insurance exchanges and insurer business models.”
  • “The Trump administration also released its drug pricing plan during Q2 2018. In our view, the plan does little to impact drug prices or pharmaceutical company business models.”
• Midterm Volatility: “Campaign season will kick into high gear during Q3 2018. We expect the political environment to be highly charged. In our view, it’s too early to call midterms as control over the recent Supreme Court vacancy and immigration will be contentious items. Plus, Donald Trump is a master campaigner who gets his base.”

Following up with Ben:

• How can we keep track of your policy thoughts and their impact on the markets:
  • WWW.EVENTSHARES.COM
• How do we find out more about Eventshares?
• How do we keep track of your writings?

***This podcast is a educational discussion about the impacts of governmental policy on investments.  It is neither an advertisement, nor an endorsement for Eventshares.***