SPOT­LIGHT ON U.S. TAX RE­FORM

De­feat of health­care bill raises prob­a­bil­ity for cut later this year, says an­a­lyst

New Straits Times - - Business -

THE death of the Repub­li­can health­care re­form may not prove to be the knife to the heart of the bull mar­ket some had feared, but to keep the Trump Trade alive in­vestors should tem­per ex­pec­ta­tions for the breadth of ex­pected tax cuts.

Anx­i­ety over prospects for the health­care bill gave stocks their largest weekly drop since the Novem­ber pres­i­den­tial elec­tion. But its fail­ure to pass could also force the Trump ad­min­is­tra­tion to come up with a palat­able tax re­form that could de­liver this year some of the stim­u­lus Wall Street has ral­lied on.

The S&P 500 rose as much as 12 per cent since the sur­prise Novem­ber 8 elec­tion win of Pres­i­dent Don­ald Trump, mostly on bets that lower taxes, dereg­u­la­tion and fis­cal stim­u­lus would boost eco­nomic growth and cor­po­rate earn­ings.

As he ac­knowl­edged de­feat for the health­care bill, Trump said Repub­li­cans would likely pivot to tax re­form. Bets on that shift in fo­cus were seen in stocks late on Fri­day, as the mar­ket cut its day losses when news of the health bill be­ing pulled emerged.

“The mar­ket be­lieves it raises the prob­a­bil­ity of a tax cut later this year since Trump is show­ing more strate­gic be­hav­iour,” said Paul Zem­sky, chief in­vest­ment of­fi­cer of multi-as­set strate­gies and so­lu­tions at Voya In­vest­ment Man­age­ment, here.

“(It) puts the mar­ket a lit­tle more at ease,”

On the cam­paign trail, Trump promised to lower the cor­po­rate tax to 15 per cent. In or­der to make the tax re­form rev­enu­eneu­tral, and agree­able to the most money-sen­si­tive wing of his party, his ad­min­is­tra­tion counted on sav­ings from the health bill that will no longer ma­te­ri­alise.

“If we want to get some­thing passed by the Au­gust break, it’s go­ing to look a lot like tax re­form light,” said Art Ho­gan, chief mar­ket strate­gist at Wun­der­lich Se­cu­ri­ties, here.

“If we set­tle some­where be­tween the 25 and 30 per cent cor­po­rate tax rate, that is far from the 15 per cent of­fered in the cam­paign trail and the 20 per cent cur­rently in the House plan, (and) I think that’s where we end up.”

Softer cuts in cor­po­rate taxes leave stocks vul­ner­a­ble after a rally on hopes for more, he said.

“It’s not a neg­a­tive, it’s just not the pos­i­tive the mar­ket had priced in.”

Aside from Trump’s progrowth agenda some in­vestors have pointed to an im­prov­ing global econ­omy and ex­pec­ta­tions for dou­ble-digit growth in cor­po­rate earn­ings as sup­port for the lofty val­u­a­tions in stocks.

“The ev­i­dence sug­gests to me that there is some Trump fairy dust sprin­kled on this rally. That said, the un­der­ly­ing fun­da­men­tals do look bet­ter,” said Alan Gayle, di­rec­tor of as­set al­lo­ca­tion at RidgeWorth In­vest­ments in At­lanta, Ge­or­gia.

A sur­vey on Fri­day showed Ger­many’s pri­vate sec­tor grew at the fastest pace in nearly six years in March, sug­gest­ing an ac­cel­er­a­tion in growth for Europe’s largest econ­omy in the first quar­ter.

Stocks could also turn to earn­ings to jus­tify their price. First quar­ter earn­ings are ex­pected to grow by more than 10 per cent, ac­cord­ing to Thomson Reuters data.

In an­other sign of in­vestor bullish­ness, last month’s read­ing on con­sumer con­fi­dence touched its high­est level since July 2001.

If earn­ings fail to de­liver dou­ble-digit growth, stocks could again be seen as too ex­pen­sive.

At US$18 (RM79.65) per dol­lar of ex­pected earn­ings over the next 12 months, in­vestors are pay­ing near the most since 2004 for the S&P 500.

“The ad­vance we’ve had and the large spike in con­fi­dence, the ex­pec­ta­tions on the econ­omy and earn­ings ex­pec­ta­tions – we con­tinue to be­lieve it is too high,” said Ju­lian Emanuel, ex­ec­u­tive di­rec­tor of US eq­uity and de­riv­a­tives strat­egy at UBS Se­cu­ri­ties. Reuters

BLOOMBERG PIC

United States Pres­i­dent Don­ald Trump says Repub­li­cans will likely pivot to tax re­form fol­low­ing the de­feat for a Repub­li­can health­care bill.

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