Trump tax reform is underpriced in stock market, UBS says



donald trumpGetty
Images/Pool

There’s understandable caution about the prospects of successful
tax legislation after Republican lawmakers failed to repeal the
Affordable Care Act. 

The
tax-reform proposal
that the White House unveiled this week
is already fraught with a number of issues that could delay
its timeline. They include a lack of details on how
revenue shortfalls
would be made up and a looming

jostle among lobbyists
for the most favorable piece of
legislation. 

Even after some renewed enthusiasm in the last two weeks for
lower corporate taxes, UBS Asset Management says Wall Street is
placing too little odds on the prospects of tax reform.

“There’s no way that the markets would be trading this way if
they were pricing in a greater than 50% probability of successful
tax legislation,” said Evan Brown, the director of asset
allocation at UBS Asset Management, which oversees more than $732
billion in holdings. “It’s starting to get priced in, but
there’s plenty of room,” he told Business Insider on
Thursday. 

President Donald Trump proposed a
“red line” corporate tax rate
of 20%, which is not as
ambitious as his initial target of 15%, but would lower the
statutory rate from 35%.

“Whereas the market took the failure of healthcare
legislation as a sign that the administration could not get
anything done, we actually think that the failure of healthcare
legislation increases the probability that there’s a step on tax
legislation because they need a win,” Brown said. “Congressional
Republicans need to be able to go in front of their constituents
in November of next year and say ‘we delivered.'”

Most-taxed companies

One of the best ways to track the odds investors are
placing on corporate tax cuts is by looking at companies that
would likely benefit the most, or those that are paying the
highest taxes now.

Tech companies dominate
the top-20 list
 compiled by Goldman Sachs. 

“Immediately after the election, it’s those high effective
tax stocks that surged relative to the S&P 500, Brown said.
“That’s been completely unwound. That basket of stocks relative
to the S&P is now below where it was below the election,
which is just remarkable.”



tax basket spread 9 29 17

Andy Kiersz/Business Insider

As this chart shows, the basket has leapt in the past
two weeks as the latest Obamacare repeal effort failed and
Wall Street saw Congress moving on to taxes. 

“Should tax reform/cuts be adopted, it would likely include
a one-time tax on untaxed foreign profits,” said Arjun Menon, a
Goldman strategist, in a recent note. Many large companies that
earn revenues outside the US avoid paying 35% by stashing or
reinvesting their foreign profits abroad.

“The proposal has remained popular because it will likely
boost tax revenues and help address the issue of
revenue-neutrality in any potential tax reform package,” Menon
said

Some of the after-tax foreign profits could be spent on
stock buybacks to boost stock prices for shareholders’
benefit. But Menon cautioned that unlike the 2004 tax
holiday, companies may be more willing to favor uses of their
cash other than buybacks because
stocks are already very expensive
.



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