Large US corporate tax cuts from 35% to 21% will boost Trump’s standing at home, though covering its cost may not appear on US voters’ radar until much later.
In the short-term we can expect a small rise in US earnings per share with a minimal boost to international equity forecast returns. Will it be a cure-all for the US economy? Reduced corporate tax means companies have more money to re-invest in their business, pay out as profit or use to create more jobs. Superficially, this seems credible but reality is likely to be more complex, so we don’t really know.
Despite the global trend to lower corporate tax rates, there seems to be no real evidence that tax cuts stimulate significant long-term growth. US interest rates are very low and corporate profits already high, yet US wages are not reflecting this. In this environment of already high corporate profits, are tax cuts needed? If investors deem the tax cuts to be permanent, overall US investment is likely to rise – but won’t rise much if they’re deemed temporary. It’s an outcome to probably be shaped by ensuing events.
Any consequent US investment boost will probably be funded in part with US savings as well as savings from other parts of the world. It may make access to capital tighter here in Australia, pushing our lending rates higher while putting competitive pressure on our own company tax rates. However, any calls for tax cuts here need to factor-in the comparative value of our imputation tax credits, which gives the company tax back to Australian investors anyway. When all factors are considered, Australia’s corporate tax will still effectively be lower than the US.
Reduced tax means less government revenue, which probably needs to be matched by spending cuts. Increases in other US taxes or enlarging an already high US debt/deficit is likely, with unpleasant effects for households. Healthcare costs for Chuck and Betty Average also seem likely to rise significantly.
What does all this mean for you as investors? For international equity investors, our clients have done quite well from US equities till now. Lately we’ve skewed away from the US somewhat because among developed world stock markets, we consider the US market is becoming overpriced. While we expect highest long-term growth from emerging markets (Asia, South America, Eastern Europe, etc), in the short-term higher interest rates create tighter capital and hence choppy seas for emerging market equities/shares. In such comparisons, our Australian stock market seems fairly priced; and AREITs seem a tad more expensive but still reasonable.
If you would like to discuss the information in this article or your investment options with one of our wealth management professionals, get in touch today!
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.