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A new race to the bottom

Peter Warnes  |  17 Feb 2017Text size  Decrease  Increase  |  

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Fiscal policy is taking over from monetary policy and now it appears there is a race to the bottom when it comes to corporate tax rates, Morningstar's Peter Warnes says.


Global equities markets are dancing to the beat of the Trump anthem. It's catchy, upbeat and a bit raunchy. It's not traditional, it's the hip-hop 2017. Will it go down as a classic or be a one-hit wonder? That is the $64 question.

US corporate earnings are also a positive influence, and while it is early days in Australia's reporting season, the initial signs are supportive.

Commodities are playing their part and are a strong tailwind for Australian resource stocks, whose weighting in the S&P/ASX 200 has increased from 11 per cent to almost 18 per cent in under a year--a 60 per cent plus increase compared to a 17 per cent increase in the benchmark.

US markets are reacting positively to the softer and more flexible approach now emanating from the Trump bunker regarding trade and protectionism.

The conversation with Chinese President Xi Jinping was cordial, reiterating the American support for the "One China" policy. I guess a possible border tax was not discussed. The early bluster has taken on a more considered approach, although there is still plenty of action.

The response to the promise of an announcement in a few weeks that would be "phenomenal in terms of tax" has itself been phenomenal. The wording was upgraded to a "massive" tax plan to be announced in the "not too distant future".

Momentum plays are in full swing, driving the CNN Fear & Greed Index into the Extreme Greed zone. This reminds investors of the Warren Buffett classic--as an investor "be fearful when others are greedy and greedy when others are fearful". Always keep in mind price is what you pay, and value is what you get.

Financials led by banks, with duel tailwinds of promised deregulation and lower tax rates, have been prominent leaders of the latest upswing. Goldman Sachs' share price is up 40 per cent since the Trump win.

It appears the politicians have taken over from central bankers in a new race to the bottom. In the eight or so years since the GFC, global central bankers were engaged in a race to the bottom, slashing official interest rates as well as embracing record-breaking quantitative easing programs, swelling their combined balance sheets by over US$12 trillion.

In terms of economic growth there has been little to show for it, but it is fair to say without the massive injection of liquidity into the global banking system, the world would now be in a parlous state.

But the lack of economic growth has forced a rethink. Monetary policy did not deliver the benefits almost everyone anticipated. Historically low interest rates did not trigger a borrowing or investment frenzy designed to jolt economic activity and growth.

Since Brexit and the ascendency of Donald Trump to the US presidency, there has been a meaningful change in the global political and financial landscape. Fiscal policy is taking over from monetary policy and now it appears there is a race to the bottom in corporate tax rates.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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