Internet stocks listed in Hong Kong and the US have suffered a heavy sell-off recently. Some analysts attributed the decline to US tax reform. Although the reform itself is actually good for tech firms, other sectors are expected to benefit more, thus the flow of funds from tech plays into other counters, such as old economy stocks.
The US Senate passed a bill to reduce the corporate income tax rate to 20 percent from current 35 percent. And American corporates are allowed to bring home foreign profits at a 10 percent preferential tax rate.
Tech giants Apple and Amazon reported their effective tax rate at 24.6 percent and 36.6 percent, respectively, last year, for instance, so the new tax rate of 20 percent will be more favorable.
Meanwhile, Moody’s estimated that the amount of overseas cash held by US companies reached US$1.3 trillion, representing 70 percent of their cash pile. Most of the foreign profits come from US tech titans. Apple holds US$230 billion in profits offshore, Microsoft has US$113 billion, CISCO holds US$62 billion and Google has US$49 billion cash overseas.
These US tech giants have opted to leave their foreign profits offshore due to the hefty tax rate at home. However, the new tax reform will allow them to bring foreign profits home at a one-time tax rate of 10 percent. Tech giants will be the biggest winners as they can more flexibly deploy their funds or increase dividends.
Also, the tax reform may further stimulate US economic growth and boost consumption, which will also benefit US tech firms.
Although tech firms stand to gain from the tax reform, traditional sectors like industrials, consumer goods and financials are expected to see a bigger boost from the tax bill. As investors flock to these counters, less capital would be chasing tech companies, and some investors might even dump tech stocks and switch to traditional sectors.
Emerging markets may suffer. Generally speaking, the tax overhaul may benefit the US economy and subsequently emerging markets which have strong trade links with the US.
However, if more smart money moves to the US market and US tech giants bring their foreign profits home, emerging markets might witness capital outflow, particularly if the Fed accelerates monetary normalization and the pace of rate hikes.
This article appeared in the Hong Kong Economic Journal on Dec. 7
Translation by Julie Zhu
[Chinese version 中文版]
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