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Trump Tax Tinkering

Evidence based investment approach.

POTUS Donald Trump wants to over haul the current US tax system. Today US tax is a curate’s egg – partly good and partly bad. You have a mixture of high rates and generous exemptions which arguably can offset one another.

Mayday for the dollar?

Two weeks ago Theresa May’s call for a snap election in the UK may have stunned Westminster but it also caught currency markets on the hop. The pound enjoyed one of its best days in a decade rallying to a six month high against the dollar. It has certainly been noticeable for US taxpayers in the UK with an interest in “Cable” – foreign exchange market jargon for the sterling: dollar exchange rate (GBPUSD). Ahead of the election announcement the market was trading round 1.25 and since then GBPUSD has been as high as c. 1.2950 and is still just above 1.29 at the time of writing. Back in the middle of March it was just above 1.21.

Expect volatility and tax cuts: three advisers on Trump’s victory

Trump-lite or triple strength Republicans? Expect pro-business, tax cuts and slashed spending.

We expect there to be more volatility in light of the fact that people have changed their view of the world in light of this new unexpected event. But is it terrible news for the stock markets or asset prices? No, they are not correlated at all.

There is little correlation between what happens right after a presidential election and when you have a new president compared with when you have an incumbent party coming in.

I actually do not think it is all bad news. Trump is pretty pro-business. He is looking to lower taxes and looking to repatriate American profits abroad and based on these things there will be more investment in the US. That is if he can push through everything he says he is going to do.

Taxes expected to rise under a Clinton Administration

Evidence based investment approach.

It is widely expected that should Hillary Clinton enter the White House in January that taxes for the wealthy will rise.  Clinton suggests that taxes will be higher for those Americans who earn more than $250,000.  For those who are earning more than $5mm per year Clinton moots that there will an additional 4% tax levied.

For US residents this is an immediate hit to the bottom line.  It is unknown as to which tax year Clinton might impose these tax rises and, as such, attention should be given as to whether one wants to crystallise tax liabilities this tax year rather than next.

For those Americans living in the UK the tax rises will probably mean that the highest US marginal tax rates will become more in line with the UK marginal tax rates and as such should not result in additional taxation. The key is ensuring that all US income taxation is off-settable against UK income tax under the US/UK Double Tax Treaty.  Care should be taken as to crystallising tax liabilities in an attempt to shelter against US taxes if UK taxes are due on any investment portfolio.  As a result of Brexit the UK tax liability on US portfolios is likely to have ballooned given sterling’s depreciation.

If these tax rises are passed the UK will become more attractive than the likes of New York and California as a tax destination as US Citizens living in the UK generally do not pay State or Local taxation.

For more details please click here to read a recent Bloomberg article on this topic.

Brexit: How would my portfolio cope?

Another day, another dozen of Brexit comments. New poll results seemingly driving the value of the Pound. It is not easy these days for investors to ignore the discussion around this month’ vote. And probably most of you are worried that the value of your portfolio will be negatively impacted. So I hope it is valuable that we revisit two of our core investment principles.

Hillary invests in low cost index funds – it’s official!

The latest financial disclosure forms filed by the two leading presidential candidates – Donald Trump and Hillary Clinton – make for interesting reading after their release on Tuesday.

Hillary’s biggest investment between $5million and $25 million was in the Vanguard 500 index fund – a low cost tracker fund with a TER of 0.16% per annum – according to Bloomberg http://www.bloomberg.com/politics/articles/2016-05-18/trump-invested-in-outsourcing-companies-he-denounced-in-campaign

On the other hand Bloomberg notes that Donald Trump holds investments in a number of companies he had denounced on the campaign trail including Apple – even though in February he called for a boycott of the company for refusing to help the FBI unlock an iPhone used by a terrorist in California. Who knew that the Donald could be so magnanimous!

Commentators such as Fortune have previously noted the similarity of Clinton’s portfolio to the low cost investment strategy espoused by her supporter Warren Buffet whereas Trump has historically favoured hedge funds for some of his largest personal holdings – http://fortune.com/2016/05/10/hillary-trump-investing/

Like the election we’ll have to wait to see how their different approaches work out for the two of them…….

By Cormac Naughten

China’s bid against the greenback

Last week the IMF invited the Chinese yuan into the basket of foreign currencies it uses to as its unit of account known as Special Drawing Rights (SDR), joining the dollar, euro, pound and yen. This marks a significant step towards what some commentators see as an eventual bid against the dollar to become the global reserve currency, and certainly a growing commitment to let market forces play a greater role in setting its exchange rate.

Prior to extending its invitation, the IMF demanded the People’s Bank of China (PBOC) make some changes to their currency regime, most notably to tie the day’s opening exchange rate to the prior day’s close. This may seem somewhat elementary to a free floating exchange rate, but previously the day’s opening rate was in effect set at the whim of the PBOC, often creating a meaningful gap against the prior day’s close. This is the technical story behind the 2% devaluation in August, the spark that wobbled global markets, particularly in the emerging world.

Since then the Chinese have been forced to use more traditional methods to maintain the yuan’s effective tie to the dollar, namely selling dollars to buy yuan, which has seen their global reserves fall from a peak last year of $4 trillion down to $3.5 trillion today, a meaningful decrease of some 12%, fighting to keep pace with an appreciating dollar.

So where does that leave things today? It is unlikely that China will embrace a full-throttle free-float exchange rate anytime soon, and there is certainly a lot left in the tank to maintain its de facto peg against the dollar. But against that backdrop, now that the yuan is a signed up member of the IMF’s SDR, the Chinese by extension have pledged to reduce the intervention that has been propping up the yuan for so long. In short this means a weaker yuan may be on the horizon, particularly given the Fed has finally started its much discussed commitment to increase interest rates, which in turn could see further upward pressure on the dollar.

There is a long road ahead before the yuan could pose any realistic threat to the greenback’s exalted position of global reserve currency, but the prize at the end may be worth the fight; and if it means a less controlled yuan, that has got to be a long-term boost for global trade.

Be Brave, and Go Bargain Shopping

I had no idea how useful my psychology degree would be when I began working in finance. The study of behavioural finance has a growing audience as more and more economists, advisors, and investors realize that despite best intentions, emotions impact financial decision making, often in a detrimental manner. Most savvy investors accept that markets are efficient and that having a well-diversified strategy is a key to long-term success; those concepts are straightforward. However, sticking to one’s strategy in the face of plummeting stock prices and negative portfolio performance requires resilience and discipline.

It is tempting to consider dialling down risk or holding off on deploying surplus cash. After all, markets could fall further and you could be in a worse position six months or even a year down the road. That’s true, but unless you have a very short time horizon, such short-term volatility should not be a cause for concern. In fact, it is completely normal and expected. When market corrections occur, remind yourself that stocks are “on sale” and there are bargains to be had. By ignoring your emotional propensity to cash in and shove your money under the mattress, you can significantly improve your long-term performance potential. By buying into the market as it approaches a trough, you are helping to lower your average cost and giving yourself significantly more upside potential than if you wait until recovery is underway. But be wary of trying to time the bottom; market timing doesn’t work, and it will just leave you frustrated and anxious.

There will always be a new crisis, but it will not be the undoing of the global economy. We have survived the Great Depression, world wars, oil embargoes, terrorism and bubbles too numerous to count. Markets react quickly, and in the long run, you are far better off participating than sitting on the sidelines. Your portfolio strategy is your blueprint for success. Stick to it to give yourself the best chance for long-term positive performance. Block out the “noise” from the media (remember, they get paid to sell stories not provide financial advice). Rebalance and be patient. This, too, shall pass.

Michael Hasenstab’s Global Macro View

Last week, myself and a few others attended the Franklin Templeton Investment Conference and had a chance to hear from Michael Hasenstab, Ph. D., about his global macro view of the world.  You may or may not know that Michael manages both the Templeton Global Bond Fund and the Templeton Global Total Return Fund. He currently manages more than $175 billion in bonds1 and is the Chief Investment Officer of Templeton Global Macro Group.  His flagship fund (Templeton Global Bond fund) is in the top 1% of its category and has more than doubled the benchmark2, outperforming it by 4.9% annually over the past 10 years3.

Active Approach in Global Fixed Income
Michael began by saying that there are broad macroeconomic themes that have set the scene for an inflection point in bonds and that he believes passive investing in bond indices may no longer be such a good strategy.  The government bonds that dominate global bond indices typically pay very little interest, often have deteriorating credit quality and are susceptible to higher interest rates in the future.