Trump’s Tax Cut and Jobs Act combined with unprecedented global growth will boost global share markets in 2018
John Tobin
The timing of President Trump’s Tax Cut and Jobs Act – coinciding with the most synchronised global economic recovery since the 1950s – will boost company earnings globally during 2018, despite recent market volatility, says John Tobin, portfolio manager with US based Epoch Investment Partners.
“The variability in GDP growth across countries is at its lowest point in over 50 years. This solid global growth cycle is a major positive for economies and company earnings growth.
“Capex has rebounded strongly and US export and industrial production has risen significantly. Meanwhile, we are expecting the transition globally, from quantitative easing to quantitative tightening, to be slow, gradual and well telegraphed.
“In fact, despite anticipated QE measures, financial conditions will remain extremely loose. In the US, the Fed’s financial stress indicators suggest markets are still awash with liquidity.”
“The lower tax rate regime in the US will impact this liquidity, and along with US companies, beneficiaries of the lower tax rates will also include non-US companies with significant earnings in the US – including automotive manufacturers, global financial and pharmaceuticals, along with companies operating in the aerospace and defense industries,” Mr Tobin says.
These tax reform initiatives, along with the economic recovery being experienced around the world, bode well for those companies already generating free cash flow.
“The most significant changes of the recent US tax reforms relate to business taxes. Lower taxes mean higher company earnings and cash flow, and these changes permanently raise the path of after-tax earnings and cash flow, which is unequivocally positive for share prices.
“It is a good move for shareholder yield.
“History suggests the extra cash from corporate tax returns will flow mostly to shareholders through dividends, buybacks and debt reductions, rather than other sources.
“This environment will be favourable for equity strategies focused on identifying companies with growing free cash flow and a track record of returning excess free cash to shareholders.”
In terms of sector allocation, Mr Tobin says Epoch Investment Partners remains overweight in telecoms, utilities, consumer stables and energy.
“The key to producing superior risk-adjusted equity returns is the identification of companies with a consistent ability to both generate free cash flow and to properly allocate it among internal reinvestment opportunities, acquisitions, dividends, share repurchases and debt repayments.
“The focus needs to be on companies which return a proportion of their market capitalisation to shareholders on a regular basis, while still reinvesting enough in the business to grow operating cash flow,” Mr Tobin says.
