Few would disagree that 2017 was a “banner year” for global investors and one of the best on record, but one month into the New Year, 2018 is also promising to be a year of opportunities for investors, in no small part thanks to the likely impact of US tax reform.
In the last few days of 2017, the United States House of Representatives passed a revised version of the tax reform bill; two days later, President Trump signed the bill into law. The bill’s passage represents America’s most sweeping tax reform enacted since 1986 and is predicted to provide more than US$1 trillion in tax cuts over the next decade by revamping individual and corporate tax rates — corporate tax will be slashed from 35 percent to 20 percent.
The new legislation has several implications. I believe that this round of tax reform will have positive implications for Asian export-led economies in 2018 via increased growth prospects of the US economy.
Though business expectations of future market growth are unlikely to be increased enough by the tax cuts to boost investment significantly, we must bear in mind that accelerated depreciation allowances have historically had some success in bringing capital expenditure forward.
Another outcome could be a rise in business investment. With more new technologies just starting to be introduced, some firms may be feeling they need to invest in technological upgrading to keep up with the competition. If enough US firms respond to 100 percent investment allowances with new orders, the current uptrend in business investment could persist.
While there are some risks for the US in 2018, I believe they are manageable. One key risk is the return of a strong US dollar in the first half of the year as corporations repatriate a significant share of their profits held overseas, which could be a direct threat to buoyant emerging and Asia markets. Also, tax reform could lead to inflationary pressures, potentially forcing the Fed to become more hawkish in the pace of its monetary tightening.
The passage of the US tax reform has more positive than negative implications for Asia in the short term. The corporate tax cut in the United States will be a boon for Asian firms operating there. However, while the tax cut could boost investment flows into the US, the question for Asian businesses is whether American companies might now re-evaluate their investments there. The tax cuts may also create pressure on governments in Asia to reevaluate their corporate tax rates.
However an increase in US economic growth may lead to increased demand for Asian exports, especially if US corporations bring forward their capital expenditure plans in response to the new tax incentives and competitive pressures. While potential downsides remain regarding its longer term consequences, we feel the recent US tax reform is likely to be a marginal net positive for the US and Asian export-based economies in 2018.
At the start of 2017, the advice we gave clients was that poor politics would likely give precedence to robust economies from a financial market perspective. We urged Asian investors to ignore the financial media negativity and stay invested, on the understanding that only rarely do geo-political issues translate into a deep or sustained equity correction.
Time and again last year, investors were rewarded if they simply stayed calm during periodic bouts of market nerves arising from geopolitics. Investors, as the year progressed, appeared to learn to stay put, fight the urge to de-risk, and stay invested.
The same advice holds for 2018. While political risks around the world remain — upcoming elections in Italy, unfinished business in Catalonia, concerns around stalled NAFTA negotiations and President Trump’s potentially more combative approach to trade with China — we believe that many of these issues are likely to provide more short-term distraction than a fundamental signal to investors. After a banner 2017, synchronized global economic growth and positive corporate earnings are slated to continue.
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