US tax boost likely to provide tailwind and lift U.S. equities higher


Fund Commentary
25 Jan 2018


Stocks finished the year positively, with the benchmark posting a 1.1% gain in December, while the Fund returned 0.1%. The largest contributor to the Fund’s performance in December was Envision Healthcare, which rebounded 8.2% amid rumors that the Company had attracted several bids from private equity firms. On the other hand, the biggest detractor during the period was Broadcom, losing 7.6% following a very strong run in 2017 (up 57.2% from January through to the end of November).

Headlines in December were dominated by politics as well as the Federal Open Market Committee’s (FOMC) statement. The FOMC responded to the improved economic conditions in the U.S. and raised interest rates by 25 basis points to 1.25%-1.5% during the month. This marked the third hike during the year, with the FOMC predicting that three additional rate hikes would be necessary in 2018. During the month, a surprising Democratic victory in Alabama’s special election to fill a vacant Senate seat triggered Republicans to get the tax bill signed into law quickly, reducing the corporate tax rate to 21%, effective in 2018.

Overall, the Investment Adviser expects the U.S. to improve its competitiveness a

s a result of the new tax reform bill. While there are many unanswered questions regarding how companies will make use of it, it is clear that the tax boost poses serious competition to the average worldwide corporate income tax rates, thereby fostering capital formation and faster economic growth in the U.S.

In particular, the Investment Adviser sees the following groups as the largest beneficiaries under the new tax bill:

1) domestic companies will benefit from the lower corporate tax rate,

2) holders of overseas cash should benefit from a lower tax rate to repatriate cash back to the U.S., thus generating earnings growth through M&A or buybacks, and

3) domestic CapEx spenders are likely to benefit from the possibility to expense 100% of CapEx.

Going forward, the Investment Adviser believes markets are likely to move higher in early 2018, as seasonal tailwinds, technical momentum, and benefits from the U.S. corporate tax reform continue to provide a nice tailwind to earnings and will lift U.S. equities. In addition, U.S. economic conditions remain strong: the team’s expectation is based on the belief that the economy will grow between 2.5%-3%, without the need for more aggressive Fed-tightening than the three currently expected. Finally, inflation appears to remain low for now.

Overall, while valuations appear stretched after 2017’s strong market rally, the Investment Adviser believes the market is likely to grind higher with consolidations being shallow and short-lived.

The views and statements contained herein are those of the Eric Sturdza Banking Group in their capacity as Investment Advisers to the Fund as of 12/01/18 and are based on internal research and modelling.