11 December 2017
Last week in the markets
Over the past week Australian shares were up 0.1% while small company shares were down 0.7%. Shares in developed countries rose 0.2% with the US market up 0.4%. Shares in emerging markets were down 0.5%. The Australian dollar fell 1.4% to 75.09 US cents. The Australian 10 year bond yield was steady at 2.53% while the US 10 year bond yield increased to 2.38%. The oil price fell 1.7% to 57.36 US dollars per barrel.
Death and taxes – not so certain
Benjamin Franklin once quipped “in this world nothing can be said to be certain, except death and taxes”. But there is uncertainty surrounding both events.
Benjamin Franklin was a founding father of the United States of America – he’s on the US $100 bill, appears on stamps and was an important part of the fictional movie National Treasure. But in the 230 years since he signed the US constitution, taxes have changed. Their Federal corporate taxes first appeared in 1909 and the statutory federal corporate tax rate has changed many times since. It was 1% in 1909, 53% during World War II and currently stands at 35%. Taxes change – they are not certain.
The US has the fourth highest corporate tax rate in the world; most countries fall in the 15% to 30% range. Understandably, President Trump’s plan to slash corporate tax rates received great attention.
The details are still being ironed out but it appears very likely we’ll see the US corporate tax rate at 20%. It will deliver about $1.5 trillion to corporates over the next decade. Decreasing corporate taxes may result in the budget deficit expanding to challenging levels – resulting in a ‘reform’ of social welfare by Republicans.
The planned corporate tax cut has immediate implications for company earnings. It also has longer-term implications for corporate expenditure, earnings growth, wages and economic growth – provided firms don’t simply hoard the savings or pay them out to investors. This is another area of uncertainty for markets.
So, what of the second certainty from Mr Franklin – death? Death too has been changing. Individuals are living longer because of ongoing medical and pharmaceutical advancements. In 1960, an average 65-year old Australian male had a life expectancy of 77.5 years. Today an average 65-year old can expect to live to 84.5 years.
Tax changes impact on asset returns and we incorporate that in the portfolios we build for you at Mine. However, longer lives have implications for the levels of super required to maintain a comfortable standard of living in retirement. If you’re unsure of what your current balance and level of contributions might mean for your retirement, then it might be time to seek advice. As Benjamin Franklin also said “an investment in knowledge pays the best interest”.
Unlike Benjamin Franklin, it seems highly unlikely that the face of President Trump would ever appear on the $100 bill – although convention will see his face on a postage stamp one day. Every deceased president has appeared on at least one US postage stamp. Of that he might be certain.
Sean Anthonisz | Senior Quantitative Analyst – Asset Allocation