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Brave new world for US equities

American companies and the US economy face an uncertain future under Donald Trump
Brave new world for US equities

Donald Trump’s victory in the US presidential election could be a boon for American companies. The real estate tycoon has pledged to spend billions on infrastructure, stem the outflow of manufacturing jobs overseas, cut the corporate tax rate, curtail financial and environmental regulations, and protect domestic industries by scrapping international trade deals. Lower taxes and higher government spending could galvanise economic growth and prompt companies such as Apple (US:AAPL) and Alphabet (US:GOOG) to repatriate and invest the cash they've stashed overseas. However, there's no guarantee the incoming president will actually pursue those policies or that Congress will approve them.

Investors are understandably sanguine about the US economy: it grew at an annualised rate of 3.2 per cent in the third quarter of 2016, its fastest rate in two years. It added 161,000 jobs in October, and the unemployment rate ticked downward to 4.9 per cent. Moreover, the US dollar has appreciated to levels not seen since April 2003. And just before Thanksgiving, all four major US stock market indices – the Dow Jones Industrial Average, S&P 500, Nasdaq and Russell 2000 – closed at record highs for the first time since 1999. Key drivers have been low interest rates, a recovery in oil and commodity prices, and the release of pent-up demand following the conclusion of the American election. In line with last year, we highlight six US-listed companies that provide insights into trends, industries and the economy as a whole.

Coca-Cola (US:KO) boasts an iconic brand, dominant market position and a global network of bottlers and distributors. But the soft drinks giant faces major challenges: fierce competition from PepsiCo (US:PEP) and Dr Pepper Snapple (US:DPS); weak trading in China, Argentina, Venezuela and other developing territories; and flagging consumption of sugary carbonated drinks in developed markets, due to growing awareness of the health risks of sugar and regulations such as taxes. Management has had to spend heavily on advertising and developing new products – such as Coca-Cola Zero Sugar in the UK – to maintain market share. It’s also selling bottling operations and other facilities to franchisees, in a bid to boost profitability, lower capital costs and focus on the Coca-Cola brand. Analysts at DBRS think the group’s refranchising and productivity efforts could widen its cash profit margin from 28 per cent to around 35 per cent by 2019.

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