Trump’s ‘border adjustment’ tax and his plan to unburden US banks; Market focus returns to Europe; Regional shift in corporate earnings growth
Market focus returns to Europe
I personally do not believe that the EU will, during 2017, allow the Greek situation to deteriorate to crisis level again while German politicians are seeking re-election. However, the German government may be forced to either accept the IMF’s demands for a lower Greek budget surplus target or see the IMF exit the bailout triumvirate to leave World Bank and EU to deal with future crises on their own. Wolfgang Schaeuble’s (German finance minister) unveiled threat that Greece would have to leave the EU if it asked for further debt reductions does not strike me as a particularly wise opening gambit, when the biggest threat to the EU this year is its continued cohesion as a solidary union.
Regional shift in corporate earnings growth
Clearly, both Europe and Japan are the better performing regions across the globe from a corporate perspective, even more so than the US. Analyst forecasts for Japan are particularly impressive, given the strong performance of the domestic economy, which is benefitting from a tightening labour market and improved growth. we believe that regionally, the growth prospects for both Japan and Europe look more attractive than the US and UK. When combined with the Earnings Per Share improvements expected for both Japan and Europe, this supports our recent change in regional allocations.
Trump to unburden US banks?
Even if Trump completely got his way in repealing Dodd-Frank, the multinational banks would still have to contend with the international rules of Basel III – a global regulatory framework for banks agreed in the aftermath of the Global Financial Crisis. In fact, having one set of rules for their US contingent and another for Europe, Japan and elsewhere could prove an administrative nightmare for the larger banks. Many banks have put a lot of time and money into making sure they comply with current rules meaning that a sudden reversal to regulation would be unwelcome. This is particularly true given that the regulatory framework in Europe is unlikely to change in the short to medium term – especially with elections in France and Germany on the horizon. This is why, all in all, we see these changes as a potential headwind for international banks, despite the slight rally in stock prices of US financials on the back of the news of Trump signing the executive order to review Dodd Frank.
Trump’s ‘border adjustment’ tax and its inadvertent consequences
In simple terms, the border adjustment rate means that companies would no longer deduct the cost of imported goods from their taxable profits, while exports would not be taxable at all. The US is a net-importer and the US economy is effectively driven by consumer spending. So, a tax on imports will almost certainly put a dent in that consumer spending. This could put the US economy back into reverse and, in the worst case scenario, generate import led inflation combined with low or limited growth.
President Trump’s policy has already set US businesses against one another (net importers vs exporters); not an ideal start for a change of policy. Furthermore, any proposed change in tax and trade policy would have to navigate the US administrative system and the WTO, neither of which are easy or quick processes. In this instance, it is to be hoped that these processes are slow, as this will provide the opportunity for markets to better understand the proposals and adjust investments accordingly.
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