Not all companies and industries in the U.S. will benefit from the Trump administration’s tax reform, says Paul Roukis, managing director and portfolio manager at Rothschild Asset Management in New York.
Roukis, whose firm manages the Renaissance U.S. Equity Value Fund, spoke about the potential impact of The Tax Cuts and Jobs Act during a Feb. 1 interview. Though his outlook for U.S. corporate earnings is optimistic, “Tax rates are very much company-specific, so it’s difficult to paint industries with the same brush,” he says.
For example, he says REITs were already tax-advantaged and likely won’t see an earnings bump. Nor will regulated utilities, he says, due to how they’re operated and regulated.
There are also some macroeconomic factors that could trip up the market this year, as well as political events.
One example is this fall’s U.S. midterm elections. If Democrats win control of one or both houses of Congress, they could look to reverse the tax cuts or other pro-business measures. Further, U.S. President Donald Trump is intent on re-negotiating trade deals, including NAFTA.
In Roukis’s view, however, the larger risk to companies and markets is monetary policy. “We are in pretty much unprecedented times, with global [central] banks having supported over $15-trillion-plus in liquidity,” he says. “At some point, these accommodative monetary policies will have to be unwound.”
While the U.S. Federal Reserve has already been tapering off its investments, other central banks are trailing behind. Roukis says macroeconomic forces such as inflation could force these banks to pull out more quickly than planned.
“I’m not sure the markets are able to handle aggressive tightening, beyond where market expectations lie today—even with such a constructive corporate earnings backdrop and economic environment,” he says.
During his early-February interview with Advisor.ca, Roukis discussed his optimistic outlook for U.S. corporate earnings. Speaking ahead of the recent market correction, he predicted corporate earnings-per-share could top US$150 this year, compared to his spring 2017 call for 8% growth and implied earnings-per-share (EPS) of US$135 to US$138 for the S&P 500 for last year.
Companies that will benefit from tax reform
On the upside, there are industries positioned to benefit from U.S. tax reform.
For some companies, says Roukis, “We’re looking at accretion of earnings of 5% or more, and in many instances 10%-plus.”
While “it’s still too early to quantify how tax savings will be allocated from a corporate standpoint,” he adds, “it’s safe to say that not all savings will flow to the bottom line and into shareholders’ pockets.” Given today’s competitive landscape, he expects some companies will “invest to support market share growth.”
Roukis outlines the ways in which U.S. companies are putting their savings to work.
Already, dozens of public companies, including Walmart, Apple and Home Depot, have announced wage increases or bonuses in the wake of the tax cuts. “It’s a tight labour market, and investing in your own people looks like a safe bet and quite frankly the right thing to do,” says Roukis
However, Roukis says companies are being more strategic than simply awarding across-the-board raises. “You’re seeing special $1,000 or $2,000 bonuses at year-end, which helps to limit the addition of fixed costs in the event that rules change at a later date,” he explains.
In January, the U.S. unemployment rate remained at 4.1% for the fourth month in a row—the lowest it’s been in 18 years.
Capital spending plans
Some companies may decide to pursue mergers or acquisitions with their newfound capital, but many have already been talking about investing in their existing businesses.
“We’ve heard mention of that in the fourth-quarter earnings calls,” he says. The tax changes have made reinvesting in the business even more attractive, as they allow businesses to write off new equipment more quickly.
Companies that would only minimally benefit from reinvesting in capital projects may decide to spend their money on satisfying shareholders or balancing the books, Roukis says, by reducing debt, buying back shares, or increasing dividends.
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