PA ANALYSIS: Is the Trump trade back on?

By John Lappin

Added 5th October 2017

Faith in the “Trump trade” faded during the summer, as controversy crowded out policy, but it has sparked back to life as the administration lays out plans for a significant overhaul of the US tax system.

PA ANALYSIS: Is the Trump trade back on?

For the early months of the Trump Presidency, markets screened out the President’s colourful remarks and concentrated on the promised economic, taxation and infrastructure policies.

However, this enthusiasm soon waned as it became apparent Trump's rhetoric was easier to say that do.

But Rathbones Investment Management chief investment officer Julian Chillingworth says he now sees a greater willingness from both US political parties to get something done.

“It is probably a 50:50 call," he says. "One issue is with the right wing of the Republican party, a lot of whom have been elected around making sure that the budget doesn’t escalate, and a number of whom come up for election next year. But the mid-terms may also mean they need to demonstrate to the electorate they have achieved something with Donald Trump as a Republican President.”

Big money

Chillingworth says the key elements are a lowering of corporation tax to 20%, a cut in income tax especially for mid ranking earners and a simplification of personal tax.

He adds: “The bit the market is getting very excited about now is the repatriation tax cut to 10% for cash held overseas.”

On a back of the envelope calculation, he says, this cash amounts to $550bn (£419bn) among the big tech players. Apple has $230bn, Microsoft $120bn, Google $60bn and Oracle $50bn.

He adds: “It’s big money. But what would they do with that money? They will distribute some of that back to shareholders but it is likely that in the package there will be a limitation. There will be a push to get them to invest it in new plant and equipment and probably research. The likes of Amazon and Apple will be keen to be seen putting money into research and possibly buying businesses that will help their research initiatives.”

Matthew Hoggarth, head of research at Thesis Asset Management, says the personal tax simplifications are a sensible idea, but there are many offsetting parts that are likely to make some people better off while others are worse off.

“It is not clear that there will be a net benefit to the aggregate level of consumer demand in the economy,” says Hoggarth. “On the corporate side there is a direct benefit to investors if profits are raised as a result of lower tax liabilities, plus the potential for a long-term growth boost if corporate investment levels rise. The key issue is whether or not this investment is likely.”

 

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