Potential winners of U.S. corporate tax cuts

“One theme that we’re closely monitoring regarding the valuations of our companies is changes in [U.S. corporate] tax rates,” says Peter Hardy, vice-president and client portfolio manager at American Century Investments in Kansas City, Missouri.

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So far, he adds, markets are banking on “speculations about the economic changes [that] the new president will cause.” But Hardy, whose firm manages the Renaissance U.S. Equity Income Fund, doesn’t expect the economy will move much; if President Trump were to cut corporate tax rates—a likely move—that could benefit investors more.

On February 9, Trump promised he will soon unveil his long-awaited tax plan—during his campaign and since his election win, Trump has indicated personal and corporate tax cuts are one of his priorities. Further, Republicans in Congress have proposed that they could pay for the tax cuts via “a so-called border tax adjustment, which would provide a rebate for exports while placing an added duty on the country’s much larger volume of imports,” reports Bloomberg.

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Says Hardy: “We don’t have visibility into the specifics of potential changes in tax rates yet, but the resulting increase in after-tax free cash flow would be beneficial, especially to those companies that have the highest corporate tax rates. Within our universe […] we’re aware of those companies that have high tax rates.” He’s also looking into how different companies might be impacted.

Currently, “many small-cap companies pay higher tax rates than their large-cap brethren,” says Hardy, meaning they could, implicitly, benefit most from a tax cut. This is the case because typically, “larger-cap companies have ways of reducing their taxes through offshore operations. So what you see is many of the larger, multinational companies having lower tax rates while smaller, domestic U.S. companies have higher tax rates.”

Hardy concludes the outperformance of small-caps could be, in part, due to these companies being potential beneficiaries of Trump’s policies.

Read:

Energy and financials still most attractive in U.S.

Trump’s tax plan favours the wealthy: Tax Policy Center (from November 2016)

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