FYI | Dec 06 2017
By Peter Switzer, Switzer Super Report
My contrarian stock plays on the passing of Trump's tax bill
The Trump tax cuts are across the line and now we have to see how Wall Street reacts to the concrete news that this much-awaited tax bill is a done deal! And while you’d expect Wall Street to go to a new level on the US Senate’s decision to take an axe to tax, stock markets can surprise you.
The tax plan will:
- Slash the corporate rate from 35% to 20%.
- Create three individual tax brackets with rates of 12%, 25% and 35%.
- Allow the majority of Americans to file taxes on a single sheet of paper.
- Roughly double the standard deduction — a set amount of income exempt from taxation, for all taxpayers.
[These are details from the House bill. The Senate bill varies, and the two must yet be reconciled with compromises required -Ed]
We know the very sniff of these tax measures being passed has seen Wall Street spike. On Saturday, we saw Russian political concerns over Trump lieutenant, Michael Flynn, take the Dow Jones Index down over 350 points but when the Senate leader, Mitch McConnell, tipped the tax cuts would be passed, the Dow rebounded, to only be down 40 points.
So why wouldn’t Wall Street go wildly positive on the news? It should, but experience watching markets makes me recall so many times that this old cliché — “buy the rumour, sell the fact” — has explained some odd market behaviour in the past.
If this happens, I’d take this reaction as another great buying opportunity because these tax cuts will power more US economic growth, greater company profits, higher stock prices, better wage outcomes and more consumer demand with this spending worth about 70% of the economy’s GDP.
They would have to underwrite a good 2018 for stocks in the USA and here as well, where we do need to play a fair bit of catch up with Wall Street.
Only last week, Macquarie Bank, which can often be conservative with its forecasts, tipped our market will rise by 9% and, if we factor in say 5% for dividends, let’s call it a 14% year for stocks if they’re on the money.
This coincides with Goldman Sachs’ positive outlook for the US economy and stock market.
“Our global GDP forecast for 2018 is 4.0%, up from 3.7% in 2017 and meaningfully above consensus,” a recent Goldman report told us. “The strength in global growth is broad-based across most advanced and emerging economies.”
This is the way Business Insider summed up the Goldman view: “First and foremost, the firm sees ‘strong and synchronous global expansion,’ marked by GDP growth of roughly 4% in 2018.
“It also says that the global economy is at very low risk of recession, given the low likelihood that central banks will aggressively hike interest rates. Further, Goldman sees emerging markets offering great growth potential.”
Putting this altogether, the risk-averse investor could easily invest in the likes of IOZ — the ETF for the ASX 200 companies — or our SWTZ, which is slightly heavily inclined towards dividends but still with the potential for growth.
You might be asking: “How are these two ETFs a contrarian play?” And I’d say for these indexes to do well, we’ll need to see some big cap stocks, such as the banks and miners, perform positively and as you would’ve seen in our recent reports, small- and mid-caps have been the star performers lately.
I think 2018 will show the big caps are not spent forces just yet.
While on the big index plays, I’m on board with Goldman on playing emerging markets.
It likes the MSCI Emerging Markets stock index but any ETF for emerging economies would be an OK way to get set at least for a year.
There’s a persistent view among market smarties that the growth cycle in emerging markets is “above-trend and rising” — and when it’s doing that, EM markets generally outperform. The iShares ETF on this play is IEM.
Back home and the courageous could punt on JB Hi-Fi, which I think has been beaten up too aggressively and too early on the threat of Amazon.
The analysts think JBH has 3.5% upside right now but I bet post-Christmas and the February reporting season, this company will have a better share price.
There might be a time to run away from retail because of Amazon but I don’t think 2018 will be that time.
To mining, and Fortescue (FMG) looks interesting with promises of a hefty dividend for 2018 and a belief that the global economy will be strongly powered, not only by China, but an infrastructure boom of global proportions that has been estimated to be worth $118 trillion!
The AFR recently looked at the local implication and said: “The infrastructure boom could last longer than the mining boom, engineers have forecast, as rising job vacancies on hundreds of projects, worth more than $100 billion around the country push up engineering and construction wages.”
“The jobs data is as clear as a bell, we’re on the up,” said Brent Jackson, executive general manager of industry body Engineers Australia. “Because we’ve got so many projects on the boil, we’re not going to see this boom back off for an awfully long time.”
FNArena says the consensus target is $5.41 and on the current price of $4.55 it implies there is a 19.7% upside with this stock. CMC’s Michael McCarthy is also an FMG fan at current prices.
I also like the new management team led by CEO Elizabeth Gaines, who will have a point to prove in a very male dominated industry.
And keeping in line with my contrarian play, I like NAB for 2018. At the time of writing, its share price was $29.62 and analysts’ consensus target price was $32.06, implying an 8.2% upside. With business conditions and confidence at such historically elevated levels and business investment starting to rebound, at long last, I’d argue Australia’s biggest bank is well-placed to benefit from an economy that I think is set for stronger than expected growth compared to consensus.
Also, NAB looks to have a progressive approach not only to its “backing business” marketing but it’s overall “More than Money” campaign, which is a message that could have good traction on social media platforms.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
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