The failure of repealing and reforming Obamacare has left the Trump administration without any legislative victory. Both the Trump administration and the Republican controlled government are eager to pass a tax reform before the end of the year. The key points of the tax reforms will have the following effects:
One-time Low Repatriation Tax Rate for Corporate Profits Held Overseas
Big cash rich MNC such as Google and Apple are holding most of their cash outside of USA due to the high tax expenses they will need to pay if the money is repatriated back. This one time "Tax Holiday" will allow MNC to move the cash back to US at a very favorable tax rate, allowing more investments and jobs to be generated with the profits made outside of US.
Implication: It will temporarily spur jobs and investments in US leading to inflationary pressures. Inflow of money back to US will also boost USD. The overall impact will a potential increase in inflation, interest rates and stronger USD, though the real impact might be marginal.
Lowering of Corporate Tax Rate from 35% to 20%
This will be a huge boon for medium to large corporations deriving most of their revenues from USA, resulting in a spike in corporate profits. Small businesses will not benefit as much as most of the profits are taxed on a personal income level, which will range from 12%-35% with most the small business owners probably being taxed at 25%.
Implication: Stock prices of mid to large size businesses will rise and will have an immediate short term impact in stimulating demand in US as household investment value increases. A long term implication will be a widening government deficit as the government now collect less tax revenue and the heavier interest burden will weigh on the economy 10 years with an additional $7 trillion deficit, weakening the USD over the long term. That is also when the Trump administration will conveniently step down... if they are not thrown out of the White House by the next election.
Simplification of Personal Tax Brackets
The key reform of the personal income tax area is the reduction of the 7 tier income tax bracket to just 3 tier.
The personal tax reform plan will primary benefit the middle-income and the rich while increasing the tax rate of the lowest income by 20%.
Implication: With an overall lower tax rate for the middle-income and the rich, spending will potentially increase while at the same time, more funds will be available to pay off loans, and potentially offset the increasing interest payment as a result of a rising interest rate environment. This may pave way for the US Federal Reserve to raise interest rate more confidently and more aggressively. USD, bank stocks and consumption base companies such as Amazon will benefit.
How Does it Affect Singaporeans
US is one of the key export destination for Singapore and shares of companies dealing with the US market will benefit due to the rise of USD. The potential faster rise of interest rate will drive up interest rates in Singapore, benefiting the bank stocks, while dampening property related stocks and REITS. Meanwhile in China, The CCP will be holding their once-in-five years meeting that will involve a leadership shuffle. This means that we will expect nothing but stability in China and we will not expect any market moving news coming from China, with the potential exception of North Korea shooting off rockets in a show of defiance and trying to embarrass China or US.
Portfolio Strategy
The long awaited turn in the direction of USD has arrived at last and the portfolio has benefited greatly as a result of it. The potential benefits of the tax benefits from the Trump tax reform has given US equities a shot in the arm, pushing it to catch up with the performance of other regional markets. Meanwhile, Asian equities took a breather with the uncertainty at the Korean peninsular. I am still concerned with the lack of a meaningful correction in the global equities since last year June, after the Brexit correction. The market is extremely complacent now and is prone to any negative news.
There has been investors who has been asking why I have not been more aggressive with my portfolio management with the good run on the equity market in 2017. My philosophy towards maintaining a "no loss" portfolio is still in place, despite the temptation of a buoyant stock market. The risk of losing 30-40% of the principle just to squeeze out another 5% return does not make sense in today's market with such rich valuation and mature bull market. The last leg of any bull market always delivers good returns as the last of the skeptics joins into the bull run, only to be routed by a stunning market crash. That is an experience which I do not wish for my investors to go through again. My aim is to make 3-4% in such a market and the portfolio seems to be on track to deliver that returns as the beaten down USD (-6%) starts to recover into the year end, barring any market correction in October.
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