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Reacting to the bifurcation

There continues to be a divergence in sector movements as the Trump era dawns with financials, industrials and energy infrastructure booming (energy had a short lived spurt, but is back in freefall) and technology and yield stocks taking a beating.

For yield, the rationale is that Trump’s plan to drastically cut taxes and boost infrastructure spending (although cutting back social spending) will add to the deficit and cause inflation to hike. Long bond yields have risen, making the dividend yield on utilities, REITs, MLPs and other stocks with attractive distributions to fall.

We see the tech argument as less sound. The story from the market is that tech companies will have difficulties in recruiting top talent due to immigration concerns, and other protectionist policies leading to overseas profit declines (trade wars/hardware parts sourced from China). Some of the decline is explained by a selloff to redeem cash to be redeployed in the aforementioned hot sectors. This has led to the tech megastocks falling to lower multiples than we are accustomed to seeing (except Amazon).

We think this is overblown and there will continue to be ample talent in computer science at top schools in the US and Canada. There has not been a lot of research behind this, but to our understanding, tech companies can certainly hire in places that are not in California (lack of clustering benefits but the world is getting smaller… because of tech). Also, from intermediate trade economics, we can see inconclusive results for America given trade wars with a smaller country, but to engage aggressively with China is almost certain to elicit an unfavorable response that the Trump Administration is doubtless cognisant of.

We are illiquid and have no intention of catching the falling knife, but are attracted to Alibaba (NYSE: BABA) in particular. It is victim to sector flight, but we note that its revenue is extremely Chinese concentrated and there is enough of a growth story there even without a major expansion into America. It will not have problems with failing to recruit talent and may even be able to fill in the void if Amazon ends up suffering from the Trump regime actually enacting policy unfavorable to American tech.

We are hoping for a collapse pre-bonus.

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Matt
ex investment banking associate
https://www.linkedin.com/in/matt-walker-ssh/

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