|Investors Cautiously Optimistic about Trump Tax Framework
The Trump administration has rolled out the framework of its tax plan, and financial institutions seem pleased overall with what they’ve seen. There will be some pain, but financial institutions are generally confident that the benefits outweigh the negatives.At an industry conference in June, Morgan Stanley Chief Executive James Gorman said that a 25 percent corporate tax rate would lift his bank’s earnings by 15 percent, assuming no changes to the business mix. The framework of the Trump tax plan calls for a 20 percent rate, so the benefit could be even greater.This is good news for a market that has seen business-loan growth decline since late 2016. The slowdown has been attributed to uncertainty about taxes and a lack of clarity on tax reform. Now that a fairly specific plan has been presented, lending is expected to increase, leading to more leasing and hiring as businesses expand.
“The hope would be that with this tax plan, the economy experiences real productivity and not artificial finance or government-driven productivity,” says Situs Managing Director Steven Bean. “There has been a dearth of construction since the financial crisis, with growth primarily isolated in the multifamily sector. With lending up, we should see real growth in the office and industrial sectors.”
Larger institutions wouldn’t be the only ones who stand to gain under the Trump tax plan. Evercore ISI analysts predict that smaller banks could also see increased gains due to the relatively high effective tax rates. The same analysts predict that a potential tax cut from 35 percent to 25 percent could boost 2018 earnings for regional banks by a median 9 percent.
The Trump tax plan also spares residential mortgages. The framework calls on Congress to retain the deduction for mortgage interest, averting a potentially significant negative effect on housing markets.
The pain points do exist, though. Deferred tax assets will lose value with a lower tax rate, which would cause a one-time hit to profits. The profit generation brought about by the beneficial elements of the tax framework would offset this loss, though, according to an article in The Wall Street Journal.
Another significant pain point could be the proposal to limit companies’ ability to deduct net interest expenses. If businesses are denied the option of deducting the interest expense, the tax hit would be sizable. Limiting the deductibility of net interest expense could have a ripple effect throughout the economy. Debt issuances would cool, slowing the pace at which companies raise and sell bonds and loans. Industry data tracker Coalition asserts that these debt-capital-markets businesses at the dozen largest global banks in the first half of 2017 accounted for $10.4 billion in revenue.
Perhaps the largest threat is losing the 1031 exchange provision. The 1031 exchange provision allows investors to avoid paying taxes on capital gains if they sell a building, then reinvest the proceeds into another property. “Like-kind” exchanges have become a cornerstone of the investment strategy for financial investors of all sizes. The 1031 exchanges are primarily embraced by the real estate industry, but transportation and warehousing, equipment rental and leasing, mining and construction are other industries that stand to take a hit if the 1031 exchange provision is removed.
These are real concerns, but investors and businesses remain confident in the Trump tax framework. They believe the added profits brought about by the beneficial elements of the tax plan would offset the loss of the 1031, and the increased lending should encourage growth even in areas not affected by the tax changes.
In Trump Tax Plan, a Windfall for Businesses Large and Small
A lower tax rate for corporations. Reduced taxes for partnerships like law firms. An easy way to bring overseas profits back to the United States without being taxed.
Corporate America had a long wish list when it came to tax reform, and on Wednesday, President Trump gave companies just about everything they wanted.
“This is much more than I think anyone could have hoped for,” said Robert Willens, an independent corporate tax expert. “I’ve never seen something like this. Taken together, this is the most dramatic and beneficial group of corporate tax reform suggestions we’ve ever had.”
The list of those who stand to benefit from the proposed tax plan, which Mr. Trump promoted on Wednesday during a speech in Indianapolis, is long. Individual earners, small businesses, law firms, hedge funds, manufacturers and multinational corporations could all see dramatic tax cuts.
There is no certainty that the main points in the White House plan will become law. Congress must now turn the nine-page proposal into a passable piece of legislation. But business leaders were nonetheless quick to applaud the broad outlines of the proposal, claiming that tax cuts they would spur new investment and grow the economy.
read more: NYT
Trump Says He’ll Decide on New Fed Chair in Two to Three Weeks
President Donald Trump said Friday he’ll decide who will be the next leader of the U.S. central bank within three weeks, and that he met with at least two candidates last week as he picked up the pace of his search for a new Federal Reserve chairman.
Trump and Treasury Secretary Steven Mnuchin met Thursday with former Federal Reserve governor Kevin Warsh, an administration official said. The Wall Street Journal reported that Trump and Mnuchin also interviewed Federal Reserve governor Jerome Powell on Wednesday.
As part of the search Trump has already met with other contenders, said another administration official, who declined to name the candidates who have sat down with the president. Financial stocks rose and bonds fell on the report of Warsh’s meeting.
Warsh, 47, currently is a fellow at the Hoover Institution. Others Trump is said to be considering for Fed chair include the current chairwoman, Janet Yellen, Stanford economist John Taylor, former BB&T Corp. CEO John Allison and Columbia University economist Glenn Hubbard. Trump has said he’s also considering White House National Economic Council Director Gary Cohn.
Powell had been regarded as a long-shot candidate, but not out of the running for Fed chair. The only Republican currently on the Board of Governors, Powell, 64, has a a solid reputation among lawmakers from both parties and has ably led the Fed’s regulatory efforts, albeit on a temporary basis, since Daniel Tarullo retired in April. Before joining the Fed, Powell spent eight years at private equity firm Carlyle Group. He also served as a senior official at the U.S. Treasury under President George H. W. Bush.
read more: Bloomberg
For the First Time in Years, U.S. Rises in Global Business Ranking
The U.S. is the second most competitive economy in the world in 2017, trailing only Switzerland, according to a closely watched index from the World Economic Forum.
The U.S. climbed one spot since last year’s rankings, reaching its highest place in eight years, possibly reflecting executives’ early optimism that a new administration would enact business-friendly policies and do away with regulations limiting corporations’ behavior.
The index, from the organization that produces the annual Davos conference on global politics and economics, assesses 137 countries on 12 factors that attract business investment and help determine productivity. The factors include nations’ institutions, infrastructure, education systems and innovation.
For the ninth year in a row, Switzerland topped the list. Rounding out the top five were Singapore, the Netherlands and Germany.
read more: WSJ
Blackstone, Apollo Team Up for Westinghouse Bid
Private equity firms Blackstone Group LP and Apollo Global Management LLC have teamed up to bid for the business of bankrupt U.S. nuclear power plant services firm Westinghouse Electric Co, people familiar with the matter said.
A successful deal would limit the financial hit to Japan’s Toshiba Corp, the owner of Westinghouse. Westinghouse filed for bankruptcy in March, hit by billions of dollars of cost overruns at four nuclear reactors under construction in the U.S. Southeast.
Westinghouse is working with investment bank PJT Partners Inc on a sale process, which is still at its early stages, the people said this week. A deal could value Westinghouse at close to $4 billion, the sources added.
Other private equity firms are also considering forming consortia to bid for Westinghouse. Buyout firm Cerberus Capital Management LP is in talks with U.S. nuclear power plant component provider BWX Technologies Inc about submitting a joint bid for Westinghouse, the sources said, cautioning that no offer was certain to materialise.
read more: Reuters
Take the Fed’s Long-Run Forecasts With a Big Pinch of Salt
The most important message for economists from the Federal Reserve last week was the lowering of rate-setters’ long-run forecast for interest rates. Fed policy makers dropped their average prediction for long-run interest rates from 3% to 2.8%, implying that if the economy were working perfectly, rates wouldn’t need to be so high to stop inflation taking off.
That should be great news for Treasurys, right? Lower yields mean higher prices, after all. Yet, investors seem to have ignored the change. Traders focused instead on the prediction of another hike this year. The mini-reflation trade that was already under way has accelerated, helped by rising hopes of tax cuts. Bond yields have risen, which shareholders took as a cue to rotate out of the soar-away technology stocks into weaker sectors more likely to benefit from a stronger economy.
What’s known as the long-run neutral rate of interest, the natural rate, or “r*,” has a big influence on how policy makers set rates. It’s the rate that should keep inflation steady when the economy is running at full capacity, and is key to judging monetary policy. The further rates are below it, the more they boost the economy. And once they reach it, monetary stimulus has been fully withdrawn. On the face of it the lower forecast last week suggests the Fed is doing less to help the economy than it previously thought.
Roberto Perli, partner at research house Cornerstone Macro and a former Fed official, says the estimate is one of the influential factors underlying Fed rate decisions. He expects forecasts for the natural rate to drop even further, and thinks it will act like “gravity” to bring down bond yields again, assuming Donald Trump’s tax cuts aren’t passed.
read more: WSJ
Private Equity Investors Putting Money with Existing Managers at Highest Clip
Private equity investors are increasingly making new commitments to existing managers, with 82% of commitments made in 2016 to existing managers, up from 70% in 2015, according to a survey by Callan Associates of 69 asset owners with a combined $1.2 trillion in assets and $103.3 billion in private equity.
This was the highest ever percentage in Callan’s analysis that dated back to 2000 when 22% of investor commitments were to existing general partners.
The largest 50 general partners managed 41% of limited partner commitments in 2016.
read more: Pensions & Investments
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