A number of President Trump’s proposed policies could stimulate economic growth and inflation, including his plans to lower taxes, reduce regulatory burdens and invest heavily in infrastructure. Bruce Cooper, Chief Executive Officer & Chief Investment Officer, TD Asset Management, talks to Kim Parlee about how the proposed policies could benefit companies and investors. Here is the report.
That's right. I mean, even rolling the tape further back, we were positive from sort of '09 to '15, overweight, quite enthusiastic. As you point out, in early 2015 we got more cautious, which was really neutral. It didn't mean we were negative. We just went from being very enthusiastic to being more neutral. And then literally right after the election, we upgraded US equities to a more aggressive overweight stance. So those are kind of the three stances we've had going all the way back to 2009.
And the reason why you had that upgrade was just-- and as you spell out in this note, which I want to go through, is just his proposed policies, and what they could do. So just set the table for us, because we're going to dissect these, but just high-level, what can he do?
I get a lot of pushback on this and questions on this. You know, I think this is where it's very important for us to distinguish between what impact the policies could have on the markets--
--stock market, bond market, you know, and of course what we might think more broadly about Donald Trump as a president. And so we're very much focused on just the impact on equity markets, bond markets, and what it means for our clients.
And you highlight the fact that, again, putting certain policy aside, this is good for economic growth.
Reduction of regulatory burdens and potential investment in infrastructure.
That's right. So those are all the policies that we're very much focused on that we think could give the economy a bit of a jumpstart. You know, we've been in this low-growth world. We've talked about that. You and I have talked about that. It seems like endlessly sometimes. And you know, broadly speaking, we're still in a low-growth world. But we think those things you referred to--deregulation, lower taxes, some fiscal stimulus--that could give us a bit of a jump to grow instead of, say, at 1.5, 1.7, which is where the US economies have been growing, maybe it could get us up above two, two and a quarter, somewhere in that range. So we're not talking about going to 4% GDP growth. But could we add 0.5% to GDP growth? That's the kind of range we think we're talking about here.
And what's interesting, I think, and what I love about this is the examples you have on here, because on average, you could see that growth, but you're going to see pockets of certain areas move faster than others. Let's talk about just the United States. And you have here that it's on an upswing. And the one thing that you talk about is personal income tax as an example, which could be stimulative. You say 44% of personal income tax filers don't pay taxes today. Under the new rules, potential new rules, it could jump to 63.
It is pretty amazing, isn't it? And you underline the word potential, of course, we don't know--
--what's going to happen, what's going to be proposed in the final analysis. But the idea here is if people have more money in their pockets because they are no longer paying taxes or they're paying less taxes, they could go out and buy stuff, which would be stimulative to aggregate demand, stimulative to growth, and get the whole ball rolling. Of course, there's a longer-term issue of what's happening to the government deficit. One thing we're saying is we try and focus on the next 12 to 18 months. We don't think that will be a focus for the markets, the next 12 to 18 months, meaning the increased debt and how we pay for all of this in the end. And it would be more--the market would be more enthused about the idea that growth is getting a bit of a bump.
Now, it's not just personal taxes. Of course, we've heard lots from both the president when he campaigned and also from the House Republicans in terms of changes to corporate tax policy. And you have an interesting number here as well that say--your analysis has shown that for every 1% reduction in corporate tax rates, there's usually a corresponding 1.5% to 1.75% increase in earnings. That's big, and especially if you're talking--
Yeah. I think this is by far the most important plank for markets in the whole program, because you gave the sensitivity to a 1% decline in corporate taxes.
We're not talking 1%.
We're estimating that it could be up to 5%. So then we do a little bit of arithmetic, and we're into kind of 5, 6, 7, 8% bump in earnings per share, which is a very, very meaningful number. And so I think if you had to pick one reason why the equity market has responded favorably to the election, I think it's this. The corporate tax rates could go down. And this is just a question of arithmetic. If tax rates go down, earnings will go up. And that's better for shareholders.
Deregulation, you also highlight, could be a big player, as well.
Yeah. We give it kind of a neat story in there. We actually had someone in to talk to us, and they said they had a friend who runs a chain of dry cleaners. Only eight stores in the chain, but he actually had to employ a compliance officer. You think, boy, it just starts to feel like regulatory overreach. And the point we're making is if you could roll some of this back—
Instead of a compliance officer, he opens another store.
Opens another store, exactly.
And you roll that out across the financial industry, which of course has been particularly prone to this increased regulation, as well as a number of other industries, and the view is that it might get growth going. I recently saw that the US is now something like the 55th easiest country in which to start a business. That actually surprised me a lot. Think of 54 countries where it should be easier to do business than the US. That's not easy. But the point being made there is that we have a pretty stiff regulatory headwind that's been put in place in recent years.
You take this and you actually put a great table in here talking about, OK, there's all these things happening. And then we've got, in terms of
S&P 500 earnings, you've got sales, earnings before interest and tax, interest, taxes, and shares outstanding. And you basically say, what do these policies affect each one of these?
So sales-- you say all of this looks positive.
That's right. The simple idea there is if nominal GDP is going to grow a bit faster, in aggregate all the companies that are operating in that economy will grow their revenues a little faster. So that's a fairly straightforward, you know, translation.
EBIT, earnings before interest and tax, you think this could be neutral. And why is that?
Yeah. The main reason there is some of these things could be helpful to companies, but we need to recognize that in the next 12 to 18 months unemployment has gotten to a very low level. We are seeing some pressure on wages. And so what we're basically saying is even if some of these changes are positive for margins, we think there will be other headwinds to margins, and they'll kind of offset each other. So the reality is margins in aggregate across the United States are already at all-time highs. We're not saying they'll go down. We're just saying we don't expect them to go up any further from here in the next 12 to 18 months.
Interest-- you're saying that it could be negative at this point.
Yeah. I think it's reasonable. And our view is that if we get some of these policies in place and growth is a little better, then interest rates will go up a little bit. We're not in the camp that says they're gonna spike, and that we're going back to a 10-year bond yield of 4%. We're not in that camp. But rates could go up a little bit, which means companies will pay more to borrow. And you know, that's a bit of a headwind to the earnings side.
And taxes-- positive. You just outlined why.
Just as we talked about, exactly.
And shares outstanding-- small positive.
Yeah. I think this has been a story really since the financial crisis. Companies have been very aggressive at buying their stock back. And part of the corporate tax reform we didn't talk about a minute ago is there's a chance also of what we call repatriation of cash that's held overseas. Lots of companies have big, big money held overseas, because if they bring it back, they'll have to pay US tax on it. Part of this tax reform that is being discussed is to maybe put in place a one-time low tax rate on that money that would be brought back. That cash could then be used to buy back stock. So we do think it's reasonable to expect--between that and repatriation and then just the ongoing generation of cash flow which companies are seeing-- will result in shares being bought back. And that's positive for earnings per share.
So when you net-net all the sales, EBIT, interest, taxes, shares outstanding impact, you say this is a net positive.
And that in aggregate, earnings per share could grow somewhere in the sort of mid to maybe even high single digits for the next couple years.
So those are all the positives that we do see right now. But there are some, you have here, potential pitfalls.
And I want to run through a few of them right here. The first is protectionist sentiments.
Yeah. I think this is by far the most important concern that we would have, and lots of people in the market would have. I think companies have been enormous beneficiaries of globalization. Not just in the last one or two years, but really over the last 30 years. And we see this through things like supply chains. We talk a lot in North America, for example, about the auto supply chain. You know, cars are built in Canada, the US, and Mexico, and they go back and forth many, many times before the car is finally built. Obviously, China is becoming an enormous part of the global supply chain. And this has been very beneficial to companies as they've looked to minimize labor costs, in some cases minimize their tax costs. And any rolling back of globalization I think would be quite challenging for companies. And you know, obviously Mr. Trump has made a lot of headlines and has been pretty vociferous in his concerns with particularly both Mexico and China. So we'll have to see how that unfolds.
The second one here I thought was interesting is that with all this extra money consumers might have, for a whole bunch of reasons you outlined, they may save it. They may not spend it.
Yeah. You know, this comes back to this idea of it could increase the debt in the long term. And some economists say, you know, look, if people out there realize the debt is going to go up, they might sit back and say, well, it's nice I've got a tax cut now, but I kind of think eventually the taxes are gonna go back up. So I can-- so that the government can pay that debt in the long term, so I may as well just stick it in my mattress, metaphorically speaking. So we'll have to see. It does seem like right now demographics are pushing North Americans to save more. The savings rate has gone up pretty meaningfully in the last 10 years. We know baby boomers are retiring. And so that could play into it, as well.
And the last one which is significant, I think, which has made this, I think, for a lot of people a somewhat uncomfortable rally, in some sense, is that President Trump is more unpredictable than past presidents.
You know, every day there's some kind of pronouncement. And that can have an impact on individual companies. We've seen that with a wide variety of US companies, where the president sends out a tweet on them, and the stock goes down. We'll have to see how he does play his cards with respect to China and Mexico. If he spends tens of billions of dollars on a wall and rolls back free trade, you know, that would all be negative. So I would say we probably have less clarity around policy direction now than at almost any time in the last 30 years. So we just need to think about that.
Let me ask you just a final question for you. Canada-- because all these things, like I said, seem to be net positives for the market, but Canada I think is in a slightly different situation in terms of the TSX hitting all-time highs, oil prices significantly lower than they were the last time we hit all-time highs, but could be a real--could be injured through these new relationships with the States, or not. We don't know yet.
That's right. So we prefer the US from an equity perspective. I wouldn't say we're negative on Canada. In fact, we're not negative on Canada. We're just more neutral. And I think some of the positives we've just been talking about with respect to the United States won't flow through directly to Canada. The classic would be corporate taxes. If corporate taxes go down in the United States, that's great for US companies. It doesn't do anything for Canadian companies, unless they happen to have US subsidiaries, which a handful of Canadian companies will. Fiscal stimulus our guess would be quite directed at US companies. You just have to listen to the president's inauguration speech to get a sense of there will probably some favoritism there. And you know, there is this lack of clarity on trade. Clearly, President Trump is focused on Mexico. We know that. But could Canada be caught in the crossfire if NAFTA is renegotiated? So that does raise a level of risk. I think, overall, we just anticipate pretty lackluster growth in the Canadian economy, as commodity prices stay lower than they were, you know, say, 10 years ago. Obviously, well off the trough levels. Companies are generating cash flow again but probably not enough to incentivize significant investments in places like Alberta. And that will just keep the Canadian economy kind of operating in a lower gear.
Bruce, thanks very much.
Great to be here.