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Tax Cut Stimulus Puts Tariff Hit In The Shade, Says Tiedemann Advisors

Tom Burroughes, Group Editor , October 16, 2018

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The CEO and investment chief of the US wealth advisor says the scale of tax cuts in the US far outweigh the impact of protectionist measures by the Trump administration.

Investors have been rattled about protectionist measures by the US and China in recent weeks, but investors should consider that the boost to the domestic US economy from tax cuts outweighs the tariff effect several times over, a senior wealth manager says.

The Trump administration’s latest round of tariffs imposes a 10 per cent levy on up to $200 billion of Chinese imports. A number of wealth management houses say such moves are a reason for taking a more cautious stance on equity markets, for example, than they had before.

But as far as Michael Tiedemann is concerned, the Trump tax cuts enacted into law at the end of 2017, comprising around $1.0 trillion of net fiscal stimulus to the economy, far outweigh the admittedly significant hit that tariffs might bring. Tiedemann is chief executive and chief investment officer of Tiedemann Advisors, a US wealth management firm with $19 billion of assets under advisement.

“In the US, the fiscal stimulus is about $800-$1.0 trillion….that dwarfs the tariff discussion by a ratio of about five to one. On top of that you have corporate profit margins that have been rising since 2015 and they continue to rise,” he told Family Wealth Report in a recent call. 

“The US equity market has been the most expensive major market that hasn’t mattered,” he said, noting that on a price-earnings ratio for forward earnings, the multiple has actually fallen from around 20 times in 2017 to 17 times now. Analysts’ earnings' forecasts, such as those compiled by Bloomberg, estimate US corporate earnings rising by 10 per cent next year.

The US market is overvalued but not extremely so, when earnings and other factors are taken into account, he said.

Given all these forces, there is a strong argument for US-based high net worth clients to continue repatriating capital to the US, he said. “This market is not really much longer being driven by central banks … in fact interest rates are normalizing,” Tiedemann continued. “Over the last 10 years, the single biggest drag on portfolios has been investing outside the US,” he said.

Fixed income
Turning to the domestic US bonds market, Tiedemann noted that the US government, by offering tax breaks to companies if they bought Treasuries – a way to pay for government debt and deal with liability-matching needs of retirement funds – had been a shrewd move. A “tax holiday” for pension funds buying Treasuries ended in September, which may explain why bond yields are starting to creep up. But the rise in yields has been orderly, confounding some fears that yields would shoot higher, he said.

Corporate debt is more of a mixed bag, he said. In aggregate, corporate debt leverage is not alarming. Where conditions could be more problematic is further up the debt-risk spectrum into the high-yield, aka “junk” space. “There will be a reckoning at some point,” he said. 

Abroad
Outside the US, Tiedemann said that there are now signs of genuine improvements in Japan’s economic performance, as the supply side reforms, corporate governance improves, and the Shinzo Abe-led administration bears fruit at last. “It [the economy] is starting to gain momentum and this time it does feel different,” he said, noting that Japan has disappointed investors repeatedly over the past two or more decades.

As far as Europe is concerned, Tiedemann said that it is three years behind the US in its monetary policy cycle, but thinks the region’s economy continues to heal.

Looking southwards, Tiedemann said some nations, such as Argentina, are very cheaply valued at the moment but leadership in the political realm was improving, holding out opportunities for recovery.

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