Trump’s Tax Policy impact on Singapore July 31, 2017

Source: http://money.cnn.com/2016/11/15/pf/taxes/trump-tax-plan/index.html

The Trump administration’s tax policy covers most news sites nowadays with global stock markets closely watching its legislative outcomes, and this included the Singapore market as well. In this article we will review the possible impacts of Trump’s tax policies on the Singapore market, on its economy and also on certain stocks. Some knowledge on this macroeconomic factor could be useful in assisting investors in their decisions moving forward.

Trump has been sitting with tax reform negotiators from his administration and Congress, hoping for a breakthrough to legislate his tax policies before year 2017 end. And this has been a hot topic for global markets if you think about it, that is because the US is the largest economy making up almost a quarter of the world’s GDP, and with significant interconnectedness and the US dollar being the most widely used currency in global trade, big developments in its economy is a big deal to open economies such as Singapore that rely on trade and investments from its peers overseas.

So first off, we will do a brief overview of the Trump administration’s main proposed tax policies. For the most part, in terms of tax, Trump’s policies contrasted to that of Obama’s policies back in 2009 where he tried to raise taxes instead of lowering them like what Trump intends to do. A probable reason could be due to the financial crisis that Obama had to tackle with upon taking office, something which is not so much a focus for Trump now as compared to focussing on economic growth instead.

Here are the main Trump administration tax policy proposals:

1. We see big plans to reduce taxes across the board, corporate taxes from 35% to 15%, small business taxes to 15%, as well as reductions and repealing of several individual taxes. In theory, low corporate tax rates should result in companies having more cash to invest and expand their business, and with lower taxes in the US, it will be more favourable for companies to operate and invest in the US, in turn boosting the US economy.

2. We also see plans to allow repatriation of corporate profits held offshore at a one-time tax rate of 10%. This inflow of funds back into the US is intended to encourage investments in the country, spurring economic growth as well.

With so much focus on growth, it’s no surprise Trump’s victory tied in with a big stock market rally, not just in the US but for most of the world.

Now what impacts on Singapore can we expect if Trump successfully pushed through his tax policies?

1. Firstly, we might see increased exports to the US, assuming the new policies spur US growth. That is because with economic growth usually comes increased consumption and thus demand for imports from overseas. Increased exports to the US could benefit our manufacturing sector and companies that export to the US such as Venture Corp (V03.SI). Now the issue is that economic growth might not be guaranteed as a result of tax cuts. If we look back at the UK, which had reduced its corporate taxes from 28% to 20% since 2010, economic growth has not been spectacular, partly because of tepid domestic spending which the corporate tax reductions did little to improve. Of course there might be a different result in terms of the US, but it is something to keep in mind.

2. Secondly, we could see reshoring of multinational corporations back to the US due to favourable tax rates and lower taxes on repatriation of funds. This could indirectly impact Singapore’s manufacturing and finance sector jobs as US companies leave the country, and maybe even certain Singapore REITs could see some impact with regards to their occupancies as US tenants might move out. However investors need not have to worry so much on this as reshoring is still uncertain and difficult to predict.

3. Lastly, a rise in interest rates could affect Singapore mortgage rates, thus impacting the financial sector, banks in particular. The reason why interest rates could rise, in terms of tax policies, is because central banks usually raise interest rates if economic growth is expected to improve, whether from tax reductions or other factors. As US interest rates rise, mortgage rates pegged to it will follow, and we may see banks interest margins improving with regards to mortgage loans they issue to customers.

Overall we are still unclear of what to expect in terms of the impact of Trump’s tax policies regarding US and even Singapore’s economic growth. Global markets are eager to know, but it all depends on whether Trump is even able to push the policies through Congress into law.

Conclusion

So summing up, we learned briefly about Trump’s tax proposals as well as their possible impact on Singapore’s economy and stocks. It might be too early to tell clearly what the true impacts of Trump’s tax policies are, but investors have to be aware of the risks. Has the market priced in the effects of the tax policies? If so, we might see more downside if Trump fails to push through his policies. At the end of the day, this space is something to watch over the next few months.

Thanks for reading. If you wish to know more information about stocks, you can speak to your designated Trading Representatives or a Dealer at a Phillip Investor Centre near you.