Global Portfolio Implications Of Pending U.S. Tax Policies

Tax cuts or tax increases: when are they coming? Nobody knows. Not even the president of the United States.

Assuming we get corporate tax cuts here, or a border adjusted tax hike, what will this do to a global equity portfolio? The implementation of new tax rules has the potential to disrupt global trade and the flow of capital, and that will have different impacts on different markets.

“On the one hand, a reduction in corporate and income taxes is thought to be demand-positive for the United States and emerging markets. It creates complexities that we later discuss,” says James Donald, a fund manager with Lazard Asset Management. “On the other hand, a border adjustment tax could worsen emerging markets trade balances, depending on how quickly the dollar adjusts.”

Since November, Trump has been proposing cutting the C-Corp rate down from the statutory rate of 35% to somewhere between 20% and 15%. It was one of the main drivers that got us to Dow 20k. A 20% tax rate is lower than Mexico’s.

In theory, companies could invest more in the U.S. because of those tax benefits, keeping the dollar strong and pulling some business from other countries.

From a top down perspective, Lazard believes Singapore ([stock_quote symbol=”EWS” show=”symbol”]), Korea ([stock_quote symbol=”EWY” show=”symbol”]), and Mexico ([stock_quote symbol=”EWW” show=”symbol”]) could be the hardest hit because somewhere between 18% and 25% of their foreign direct investment comes from U.S. corporations.

Then there is the border adjustment tax (or, BAT). Mexico, Colombia ([stock_quote symbol=”GXG” show=”symbol”]), and Asian ([stock_quote symbol=”ADRA” show=”symbol”]) countries—primarily Malaysia ([stock_quote symbol=”EWM” show=”symbol”]), Singapore, and China ([stock_quote symbol=”FXI” show=”symbol”]) — are the most vulnerable, Donald wrote in a report to clients published on April 7. He believes Mexico and Singapore will be the two hardest hit by a BAT.

“U.S. policy proposals reveal the intricacies of global supply chains and global business models,” Donald says, adding that fund managers need to focus on stock picking over indexing — and hopefully pick some winners — taking in the fallout of a tax reform in Washington.

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