Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Mark Phelps, from AllianceBernstein.
Hello, Mark.
Mark Phelps: Good morning.
Wall: So, big week for the U.S. Not only have we marked 100 days of Donald Trump in office, we also have confirmation that there is going to be a huge fiscal announcement from the new President today and also, we've seen markets reach all-time highs again this week, the NASDAQ and indeed, S&P is very high as well. This is brilliant news for investors who have taken advantage of this rally. But the thing that is always the unknown is Donald Trump himself. So, how do you as investor that has exposure to the U.S., over 50% of the fund has exposure to the U.S. economy, invest with that big unknown?
Phelps: So, I think, there are a couple of things. The first one is we try to take the politics out of the equation and try and look at what the actual impacts of the politics on earnings are likely to be. So, he has announced or we hope he announces today that tax will be cut, this is corporation tax, maybe 15%, I think more likely to be 20%. The markets have already factored some of that in, but that genuinely does drive earnings. If companies have to pay lower taxes, their profitability is more, they can pay that out to investors. So, we're happy to see that. The devil of course is always in the details. So, today, yes, let's get some understanding of exactly what he wants to do.
The other thing is, there's probably going to be ability to repatriate cash that is in U.S. corporations' overseas bank accounts. If they haven't brought it back, it gets taxed heavily. If they do, they may be getting a one-off 10% rate which is going to encourage a lot of that money to come back. The republicans need to do that because it helps balance the book. They will get quite a large tax take, but it's only for a year.
So, ultimately, from our perspective, we're looking at the companies, those are nice to have, the markets have factored in, it's one of the reasons it's gone up. But from hereon in, it's probably more about the earnings in terms of can the market go further. And so far, with this quarter, so good, actually, reasonable earnings momentum. So, I think, the market is saying, fine, if we get today a reasonable tax situation from the Trump administration, we can move forward on the earnings. If we don't, we probably have to set back.
Wall: Putting aside his military efforts, this is the second big piece of news coming from Trump. And the first one didn't go so well. That was his efforts on healthcare. How important is it that he gets this right for sentiment, both in terms of consumer and indeed, investor sentiment?
Phelps: I think, this is absolutely critical. A number of us, I think, were very surprise to see with what went with healthcare first. I don't think he really wanted to, but the republicans had focused so much on Obamacare and the campaign that that was sort of – it was there and it had to be slain, well, they failed. If he used to put forward a proposal this time and it not make it through Congress, I think he is going to look very damaged.
At the end of the day, Trump was trumpeted as the dealmaker, the great dealmaker, a huge dealmaker, the best ever dealmaker. And if he fails twice, then I think he is genuinely in a very difficult position. If he hasn't managed to get a deal agreed with republican leadership already before he takes it to sort of national stage, I think he is going to get into a very bad place. So, we'll see what happens. But he does need to get a deal done.
Wall: And if he gets this deal done, how much of it is already priced in or how much upsurge can we expect from the market? And presumably if he doesn't, if he hasn't done his homework, as you suggest he should, presumably then the market does see a correction?
Phelps: I think in terms of the market going up just on tax cuts, you'd have to say, this is not good news and the market will definitely take, I think, a step back. I don't think it will be dramatic, but it would certainly be, okay, that's not happening, we need to reprice for that. Then it comes back to, right, what are the fundamentals. There are some things that are beneficial from a U.S. economy perspective.
The economy is growing probably 2.5%, maybe second half of this year into next year get into 3%. That's okay. It's not great, but it's okay. We would probably have been thinking about something of a slowing U.S. economy going into next year if we don't get some movement on things like infrastructure spending and some degree of sort of fiscal boost. But if we do, that can extend the runway. That's good ultimately for earnings. And we do have a situation where the animal spirits, I think, are alive and well. Companies are seeing opportunities.
And one of the things that Trump has managed to do is repel quite a lot of legislation that was impinging on business doing business. He can do that mostly by executive orders. So, he doesn't have to go through Congress. So, if he actually tops those up, it's quite a big deal. Obviously, the one to come is Dodd-Frank within the financial area of the marketplace. But things like the oil pipeline, there's a whole raft of things that have come through are genuinely helping business.
So, I think, the U.S. is in a reasonable position. I think the valuation is okay. It's not great. I think we'd take step back, but then I think we look at the fundamentals and say, they are still probably reasonable. And what are your alternatives? It seems very unlikely in a rising straight environment, you'd like to put all your money into fixed; cash obviously is earning you nothing. So, equity, it's not going to make you a fortune, but I think it will make you a reasonable return.
Wall: Mark, thank you very much.
Phelps: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
