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Article | 22 January 2018 | Investments
Tax cuts are likely to benefit domestically focused medium sized companies the most, as these companies do not benefit from having any offshore shelter to avoid.
2017 was a stellar year for growth funds particularly those with a high weighting in technology. This was one of the best performing sectors in many markets across the globe with the usual suspects, such as Facebook up 53% and Amazon up 56%, driving up the bulk of the returns.
As a result more value focused funds, such as Robecco US Premium Equities and Majedie UK Equity lagged some of their growth peers.
But is this set to change and will value funds perform better in 2018?
Significant US tax cuts will have an impact this year. Reducing their tax rate dramatically, corporates will change their behaviour and many will look to once again domicile in the US. Other countries will take note once they begin to lose key global companies and will be forced to take action.
We have already heard mutterings from Australia about reducing tax and we expect this is just the start. The US has essentially kicked off a global tax war. This creates a more constructive backdrop for equities as it enables corporates to continue their profitable run.
Companies will receive a windfall from tax cuts that they will use to buy back their own stock, spend on acquisitions and increase wages, which could further extend the global economic cycle that started in 2017. This could benefit medium sized companies as large companies go on a spending spree. Tax cuts are likely to benefit domestically focused medium sized companies the most, as these companies do not benefit from having any offshore shelter to avoid or reduce the tax they pay like many of the large tech companies in the US.
Together with Donald Trump’s deregulation of the banking sector, as well as rising interest rates, we think financials are well placed to benefit. This would support the likes of Robecco US Premium Equities and Majedie UK Equity, which has exposure to globally positioned financial stocks.
Broader global growth during 2018 would also potentially benefit Majedie given their holdings in the commodities sector.
Overall we believe this could be the year when value stocks start to provide more value.