Weekly View - Mind the tax
Last week President Biden put forward a proposal to raise the capital gains tax from 20% to 39.6% for those with incomes of over USD1 mn to fund his USD1.5 trn stimulus plan. That rate will likely get scaled down in Congress, but be approved nonetheless. As the US administration looks for new financing sources, so will other governments that have supported their private sectors during the pandemic. We expect a gradual rise in corporate tax rates. This is all in keeping with our “who pays the bill” theme and we continue to emphasise that strong cashflow generation is a key criterion in stock selection.
Over a two-day international climate summit that kicked off on Earth Day, Biden launched a global “green” initiative with 40 heads of states. Keen to reassume the reins on global climate leadership, he pledged a 50% reduction in US carbon emissions by the end of this decade from 2005 levels. The EU’s own reductions pledge, which is roughly on par with the US’s, was enshrined into law last week. We are in favour of renewable energies and ESG-driven (environmental, social and governance) investments. Meanwhile, the pandemic rages on in India, with the authorities likely to begin imposing partial shutdowns. Japanese cases have also started to rise, putting the Olympics due to take place in three months’ time at risk of cancellation. In spite of this, strong export and machinery orders are supporting the Japanese market, which continues to perform well. We are overweight Japanese equities.
Earnings season continues and beat ratios − at both the sales and earnings levels − remain impressive. Given that markets are elevated, earnings reports are especially key, with investors rewarding companies that beat estimates, while penalising those that miss more. Encouragingly, so far corporate guidance has been positive. This is further supported by last week’s purchasing manager indices, which came out better than expected at the same time as Europe’s vaccination campaign accelerates. In European politics, German polls show that the Greens could come in ahead of the incumbent CDU party in upcoming elections and more notably, the German Constitutional Court decided against preventing the launch and funding of the European recovery fund. While Poland and Hungary present remaining hurdles, we expect these monies to be disbursed as scheduled.