Prem Watsa (Trades, Portfolio) embarked on his “largest and best” acquisition in his company’s 31-year history this week, encouraged by what he views as a pro-business environment ushered in by the election of President-elect Donald Trump.
Watsa is known as the "Warren Buffett (Trades, Portfolio) of Canada" because he operates a giant insurance conglomerate, invests the float according to value principles and allows his acquired companies to run on a decentralized basis. After years of being cautious of financial markets, Watsa poured $54 per share, or $4.9 billion, into his company, Fairfax Financials (TSX:FFH, Financial)’s “transformative” acquisition of global property and casualty reinsurer Allied World Assurance Co. (AWH, Financial).
Allied’s sizable footprint in the U.S. sweetened the deal because Trump’s election and Republican control of the house and senate, Watsa said, has the “strong potential to make the business climate for growth in the U.S. great again.”
“If President Trump can move forward policies to reduce taxes, reduce burdensome bureaucracy and regulation and incentivize much needed infrastructure spending, we believe the U.S. will see significant growth in GPD and our businesses in the U.S. including Allied World will benefit from any such economic development,” Watsa said in a conference call Monday.
The president-elect has based his economic platform on expanding business, which has sparked a bullish market.
Another camp of economists and investors directly oppose Watsa's view, saying Trump's policies could have a negative impact on the economy. The Economist wrote in November:Â
"The next president threatens to erect trade barriers, which would disrupt supply chains and dampen productivity growth. He wants to deport many of America’s 11 million illegal immigrants, which could reduce the size of the labour force by up to 5%. And his tax plan is ruinously expensive, costing almost $7 trillion over a decade, or around half of America’s outstanding national debt."
James Pethokoukis of the American Enterprise Institute discussed Trump's plan to prevent companies from leaving the U.S. by promising "consequences" to those who try.
"The idea that American corporations are going to have to make business decisions, not based on the fact that we've created an ideal environment for economic growth in the United States, but out of fear of punitive actions based on who knows what criteria exactly from a presidential administration. I think that's absolutely chilling," he said on CNBC's "Closing Bell."
Others have voiced concern that corporate tax cuts would flood already profitable companies with more cash and result in few promised new jobs.Â
Watsa’s conviction diverges strongly from his previous caution. In recent years, he has maintained full hedging on his investment portfolio in preparation for a possible “economic storm,” even though the hedges curtailed his investing gains. Watsa has held large long positions in BlackBerry (BBRY, Financial), IBM (IBM, Financial) and Kennedy-Wilson Holdings (KW, Financial) in recent years and since Fairfax’s founding, he has returned 8.6% annually on his portfolio investing using a value approach. In 2017, he plans to move from defense to offense, he said.
The much-followed investor also shared his investment strategy in the climate he ancitipates. He said bond rates have bottomed out and will likely continue their climb since the election, so he plans to own bonds of less than two to three years in duration. He was most optimistic about equities.
“When the biggest economy in the world is on its way up, which we think as we said earlier because of Trump’s policies – very pro-business, corporate tax cuts, infrastructure spending, really smart people in charge – we just think the downside is significantly reduced and we think in a market like that, in the U.S., and perhaps elsewhere, it becomes a value-oriented stock picker’s market,” he said.
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