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SLI: US corporate tax cuts not priced in

US corporate profits are expected to grow 5-15% on average this year, said Andrew Milligan, Standard Life Investments’ Edinburgh-based head of global strategy.


Milligan has an overweight on the US equity market.

“Towards the end of last year, we started to see an improvement in company profits in many countries around the world, especially in the United States,” he said during a recent media roundtable in Hong Kong.

He expects corporate profits to grow at 5% this year. The growth could be even higher, at around 10-15%, if president Trump cuts corporate taxes as much as he promised during his campaign, he said.

“It is a business-friendly cabinet, and we would assume that the policies that the Trump administration takes are business-friendly. It may include quite sizeable corporate tax cuts, and I don’t think that is all yet priced in to the market,” he said.

Sector selection

Some sectors, however, could be hit due to Trump’s stance on global trade, he said. A classic example would be clothing and footwear, since it is significantly cheaper to have clothes and footwear to be manufactured in Vietnam or Bangladesh than in the US.

Milligan did not give the firm’s asset allocation by sector, explaining that sector decisions are taken by the firm’s equity fund managers.

He added that sector choices are complicated at this time.

“On one hand, you can make a pretty decent argument for US consumer stocks and cyclical type stocks, but when you come down to pharmaceutical stocks or energy stocks, it is going to come down to regulation [coming from the Trump cabinet],” he said.

Wary of EMs 

Other equity market overweights are Japan, Europe and Eastern Europe, particularly Russia.

However, the firm is neutral on emerging markets, despite the relatively strong performance in 2016, driven by stronger intra-emerging markets demand as well as demand in the US and Europe, according to Alex Wolf, senior emerging markets economist, who also spoke during the discussion.

Wolf, who just relocated to Hong Kong from Edinburgh last week, added that EM growth was also bolstered by the monetary stimulus in China, as well as Brazil and Russia coming out of recessions.

But he sees significant EM risk.

“Trump’s policies on trade and foreign policy have to be the highest risk facing emerging markets, whether it is a disastrous trade war between the US and China, or even a marginal increase in protectionism. Emerging markets stand to lose by far the most,” he said. 

Clarity on trade and protectionism policies, the direction of the US dollar and the interest rate tightening cycle will determine allocation to emerging markets, Milligan added.



Part of the Mark Allen Group.