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VOL. 41 | NO. 49 | Friday, December 08, 2017
Tax cut winners and losers
NEW YORK (AP) — As a Republican-backed tax cut bill makes its way through Congress, some investors are scouring the market for potential winners and losers: companies they think will benefit the most, and those who'll be left out. But it might not be that simple.
The top corporate tax rate would fall to 21 percent from 35 percent if the bill passes in its current form. In recent days banks have rallied, as investors feel they are likely to get a big boost from that change. Technology companies have lagged, as they already pay taxes at relatively low rates.
Mark Hackett, chief of investment research at financial services firm Nationwide, said investors should be careful about buying and selling swaths of the market just because they might be helped or hurt by the bill. After all, the bill hasn't been finalized and elements of it could still change. The bill's impact is also more likely to be felt on a company-by-company basis depending on each firm's circumstances, Hackett said, rather than across entire industries.
Q: Which parts of the market should perform best if corporate taxes are cut?
A: The general perception would be that companies with high taxes are companies generally focused in the United States, like financials, telecoms and (consumer) discretionaries and staples. Those are the sectors most people think would benefit. They're pointing to technology and energy as companies that generally have more external exposure and therefore less benefit. It really is more complicated than that.
The one area that's inarguably hurt here are highly leveraged companies like real estate investment trusts, like some of the private equity funds, certainly like some junk bond funds. They are disadvantaged because of the limit on interest deductibility.
Q: So you don't think technology companies, for example, will struggle because they'll get a smaller tax cut?
A: Technology has been weak recently. Some of that's been due to the headlines of 'tech doesn't benefit because they're international.' The market is underappreciating the potential here. They don't get as much help from the absolute level of rates, but they get some tax credits and some help from repatriation. If you look back to 2004, when the last repatriation happened, it overwhelmingly benefited the large cap tech stocks. Under the current tax structure it's prohibitively expensive for them to take that cash back to the United States. You're probably in the trillion dollar-ish range (being repatriated) and it's going to be heavily concentrated in about six or seven companies, Apple being far and away the biggest, as well as Microsoft, Google, Cisco and Oracle. Some pharmaceutical companies as well.
Q: Then you aren't making any dramatic moves to capitalize on any tax cuts?
A: I would be very hesitant, as an asset manager, to try and exploit that because it's so temporary. This benefit should get priced in over the next 12 months or so.
We definitely think there are benefits coming for corporations. We think there's upside to what the market currently is embedding. We think there's some nuances to this, like the repatriation, that people are underestimating. So we definitely think that if this happened, and it seems very likely at this point that it will, that it's really priced in to the market.
It's less clear how much benefit there is for the overall economy. The general perception that value sectors benefit and growth sectors don't is overly simplified. It's more company by company than industry by industry than I think most people have looked at it to date.
Answers have been edited for clarity and length.