Principal Global Perspectives

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1 Principal Global Investors Principal Global Perspectives May 2017 Trump s first 100 days 100 days. 2,400 hours. 144,000 minutes. 8,640,000 seconds. and replacing the Affordable Care Act, beginning It sounds like a lot of time when you break it out, but as measurement as a ridiculous standard by which to be many of us will testify, the clock has a habit of ticking all construction on a border wall, undoing President Obama s executive orders to protect DREAMers1, and unleashing a flood of regulatory cuts. However, with his one hundredth day in office approaching, President Trump reconsidered his position, describing the 100-days judged but that wasn t about to change a tradition over too fast. 80 years in the making! In that context, 100 days may seem like a very short period So how far has the Trump administration progressed to be expected to achieve anything meaningful. But ever since Franklin D. Roosevelt coined the phrase in his July 24, 1933 fireside chat to the American people the first 100 days of a new presidential administration have become the established measuring stick for judging its initial effectiveness. Regardless of the brevity of the period, the first 100 days is when a new president s power and influence is likely to be greatest, enabling the new leader to push aggressively and fulfill their campaign mandate. April 29 marked Donald Trump s first 100 days in office, and so the time has come for his new administration s progress report. During his election campaign, Trump promised purposeful action during his first 100 days on a long list of items. The list included introducing term limits on members of Congress, establishing a lobbying ban, renegotiating NAFTA, passing tax reforms, repealing against his lengthy to-do list, and what has been, or will likely continue to be, the impact on markets and the global economy? Investment professionals from Principal Global Investors and our investment boutiques share their thoughts on what s been achieved, what s still up in the air, and what s been the subject of a Trump changeof-heart (at least for the moment). Progress versus promises For our review of the new administration s first 100 days, we ve focused our attention on those items that could make for meaningful change in the realms of trade, economics, or investment. Within the United States, those items include deregulation (particularly financial), healthcare reform, tax reform, and infrastructure spending. From a global perspective, the issue of trade is of the utmost importance. 1 The DREAM Act (Development, Relief, and Education for Alien Minors) is an American legislative proposal for a multi-phase process for illegal immigrants in the U.S. that would first grant conditional residency and upon meeting further qualifications, permanent residency. Brexit: Treaties, Tensions, and a Referendum 1

2 Instead of taking a meaningful bite out of Dodd-Frank, or replacing it altogether, I believe the Trump administration will likely nibble around the edges of the behemoth law. And they ll do that by installing new regulatory heads, making enforcement less adversarial, and focusing on empowering mid-tier, regional, and community banks Randy Woodbury Portfolio manager at Principal Global Fixed Income Federal Regulations Deregulation is a high priority for the president. In his view, federal overreach has created an unnecessarily difficult operating environment for businesses, and thus made it more challenging for the economy to thrive. For every new federal regulation, two existing regulations must be eliminated, Trump declared on the campaign trail. It s not surprising, therefore, that one of the president s early executive actions kicked off a review of the Dodd- Frank regulations. This is just the start of what could be a very long process. And it s a process that is unlikely to result in monumental change, in the opinion of Randy Woodbury, portfolio manager at Principal Global Fixed Income. Does this mean the end for Dodd-Frank, the cornerstone regulation that has become synonymous with the global financial crisis? I think not, said Woodbury. Dodd-Frank regulations are primarily in statute form and many components would require 60 votes in the U.S. Senate to change significantly. Because of this, Woodbury believes there is virtually no possibility of a full repeal or replacement of the regulations. So what can we expect the Trump administration to accomplish? Probably, at most, a refresh. Instead of taking a meaningful bite out of Dodd- Frank, or replacing it altogether, I believe the Trump administration will likely nibble around the edges of the behemoth law. And they ll do that by installing new regulatory heads, making enforcement less adversarial, and focusing on empowering mid-tier, regional, and community banks, said Woodbury. Even within the U.S. banking industry itself, there has been no groundswell for wholesale changes at least if you strip away the headline rhetoric. The new regulations have fostered confidence and stability within the banking system, which would have seemed impossible five years ago. Furthermore, U.S. banks are relatively happy with their current position relative to other global banks, according to Woodbury. After the financial crisis, they recognized loan losses faster and recapitalized more quickly than their European counterparts, putting them on much stronger competitive ground today. Would they like the stress tests to be a little easier? Or for ROEs to move from single digits back to low double digits? Sure! But they re not demanding it, and they want nothing to do with any discussion of a modern-day Glass Steagall 2, he said. While the review process is obviously in its early days, as far as modifications to the regulations are concerned, changes will likely be at the margins. Healthcare Healthcare reform was a hot topic for Trump s campaign, but it was also to prove his new administration s first major defeat. Lack of support within the Republican party ultimately forestalled the first iteration of the new American Health Care Act (AHCA), which was designed to repeal and replace the Affordable Care Act (i.e., Obamacare). However, the new administration is not giving up that easily, and is currently reworking the legislative proposal with the goal of garnering the necessary votes on its next attempt. But, how likely is it that AHCA 2.0 will be passed, and what does the continued uncertainty mean for companies in the healthcare sector? 2 The Glass-Steagall Act was passed by the U.S. Congress in 1933 and prohibited commercial banks from participating in the investment banking business. Brexit: Treaties, Tensions, and a Referendum 2

3 As this paper went to press, there were hints that some of the Republican resistance was waning, but little clarity on when a vote might take place. Still, Mustafa Sagun, chief investment officer at Principal Global Investors, is not confident that the new administration could quickly pull off a successful vote on the revised AHCA. The AHCA may not be dead, but the near-term probability of comprehensive legislation passing the House is low, and lower still in the Senate, he said. So what could be the next steps, and when might they happen? We think the most likely scenario, at this point, is that pieces of the legislation will be addressed this year through regulatory action by the Department of Health and Human Services (HHS). Or that Democrats and Republicans might possibly commit to work for a year on revamping Obamacare into a format that would pass the House and the Senate and be included in the April 2018 appropriations bill, said Sagun. So, for the moment, and as House Speaker Paul Ryan publicly stated, Obamacare remains the law of the land. For millions of consumers, that means they get to hold on to their insurance, while hospitals and Medicaid-managed care will continue to benefit from the Medicaid expansion that has taken place under Obamacare. In this state of flux, there are a number of sectors within the heathcare sector to watch: Diversified managed care s situation is unchanged, but it will be important for the new administration to continue to support the individual market through regulatory measures (which the HHS has broad authority to do under Obamacare) or face voter backlash. Funding for 2017 is in place, but cost sharing rebates (CSRs), which the president has recently threatened to withhold, must continue for 2018 or insurance companies will exit markets. The situation regarding CSRs needs to be clarified and resolved quickly, since bids for 2018 are due in June. Pharmaceutical and biotech companies have already received calls from the president for solutions to the issue of rising drug prices. If a solution doesn t appear organically, the Trump administration could adopt unconventional measures to resolve the problem. Generic and biosimilar drug companies are expected to face no new legislation, a positive for them. The Trump administration is also putting pressure on the Federal Drug Administration (FDA) to streamline its approval process for drugs and devices. This would be positive for both innovative branded products, as well as for generic drug approvals, which the FDA already prioritizes. Medical technology and drug-supply-chain companies can expect things to be incrementally positive on continued volumes. Tax reform In terms of changes that have the potential to make a big difference to future growth, tax reform is right up there. But the proposed changes arrived very late in the administration s first 100 days, and certainly way too late to have any notable or immediate impact. With Trump s tax reform proposal, the details will matter, and many details were missing from the proposal. Once Congress picks up the proposed reforms, we will begin to see more clarity around the potential economic impacts. The real question is whether the proposed reforms will suffer the same fate as AHCA 1.0, or can garner enough support across both houses to bring the massive tax cut that Trump promised the proposal would herald for taxpayers and businesses. Infrastructure spending Along with the tax reforms proposed late in the period, infrastructure spending had the potential to make a big difference to economic growth, but progress on the issue was largely absent from the first 100 days. That was a lost opportunity in Mustafa Sagun s view. We have been saying that the order in which the new administration will tackle initiatives would make a big difference to the markets, Sagun said. And, so far, it s been in the wrong order. Brexit: Treaties, Tensions, and a Referendum 3

4 The market is interested in policy measures that will likely increase future growth including tax cuts, infrastructure investments, and deregulation that would incent financial intermediaries to lend more. But what we got instead was a lot of political dysfunction on initiatives that are not even growth related, said Sagun. International trade The worst trade deal ever signed by the United States those were the precise words that candidate Trump used to describe the North American Free Trade Agreement (NAFTA) while on the campaign trail. His promise: renegotiate NAFTA s terms in the United States favor. However, it s unclear at this point what precisely he plans to do. On the one hand, Trump appears to have backed off his threat of abandoning the deal and is instead proposing to keep major components of it in place once renegotiations start. On the other hand, he has continued to rail against what he sees as unfair treatment of U.S. businesses in other countries. So far, however, the protectionist side of Trump s pro- America policies has been limited. Seema Shah, global investment strategist at Principal Global Investors, sees this as a positive. Anti-trade action would negatively impact markets, said Shah, particularly emerging markets, and the global economy s dependence on and vulnerability to China s economic performance makes this a serious risk. In addition, Shah added, protectionism would also eventually impact the U.S. economy. In the short term, protectionist U.S. trade policies would add to the reflationary impetus from any tax reform, but longer term it would be a big drag. For 2017, however, I do not consider it a meaningful threat to U.S. growth, said Shah. The next 100 days and beyond It s probably fair to say that in his first 100 days in office, the new U.S. president has discovered how challenging it can be to turn promises into actions even when your party holds the majority in both houses of Congress. He s probably also discovered that it s not just about taking action, but choosing the right promise on which to take action, and then taking appropriate action. If he takes these lessons on board, we would hope to see him refocusing his attention on policy changes that could have the greatest potential impact on future growth including tax reform and infrastructure investment. But he will also need to keep a weather eye on the rest of his populist mandate, which resonated so clearly with his followers. You can find the latest insights on our website, and by following Principal Global Investors on LinkedIn. Brexit: Treaties, Tensions, and a Referendum 4

Disclosures Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of April 2017.

Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision.

5 Disclosures Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of April Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision. The information in this document contains general information only on investment matters. It does not take account of any investor s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account. Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document or in the information or data provided in this document. Any representations, example, or data not specifically attributed to a third party herein, has been calculated by, and can be attributed to Principal Global Investors. Principal Global Investors disclaims any and all express or implied warranties of reliability or accuracy arising out of any for error or omission attributable to any third party representation, example, or data provided herein. All figures shown in this document are in U.S. dollars unless otherwise noted. This document is issued in: The United States by Principal Global Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission. Europe by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London EC2V 7JB, registered in England, No , which has approved its contents, and which is authorised and regulated by the Financial Conduct Authority. Singapore by Principal Global Investors (Singapore) Limited (ACRA Reg. No H), which is regulated by the Monetary Authority of Singapore and is directed exclusively at institutional investors as defined by the Securities and Futures Act (Chapter 289). Australia by Principal Global Investors (Australia) Limited (ABN , AFS License No ), which is regulated by the Australian Securities and Investment Commission. This document is issued by Principal Global Investors LLC, a branch registered in the Dubai International Financial Centre and authorized by the Dubai Financial Services Authority as a representative office and is delivered on an individual basis to the recipient and should not be passed on or otherwise distributed by the recipient to any other person or organisation. This document is intended for sophisticated institutional and professional investors only. Japan by Principal Global Investors (Japan) Ltd. (Kanto Local Finance Bureau (Kinsho) No. 462, Japan Investment Advisers Association; Membership No ). In the United Kingdom this presentation is directed exclusively at persons who are Eligible Counterparties or Professional Clients (as defined by the rules of the Financial Conduct Authority). In connection with its management of client portfolios, Principal Global Investors (Europe) Limited may delegate management authority to affiliates who are not authorized and regulated by the FCA. In any such case, the client may not benefit from all the protections afforded by the rules and regulations enacted under the Financial Services and Markets Act India by Principal Pnb Asset Management Company Private Limited (PPAMC). PPAMC offers only the units of the schemes of PrincipalMutual Fund, a mutual fund registered with SEBI. This material is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Investing involves risk, including possible loss of principal. Insurance products and plan administrative services provided through Principal Life Insurance Co. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. 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