Equities

Letter from America - part two: What will be Trump's top legislative priorities?

UK equity fund manager David Docherty recently visited the US to discover more about the new Donald Trump administration and its likely impact on markets. In part two of his findings, he discusses deregulation, tax reform and healthcare, which are likely to be the key areas of focus for the new president.

02/01/2017

David Docherty

David Docherty

Fund Manager, UK Equities

  • Trump’s energetic commitment to deregulation is highly market and economy friendly. This is actionable through executive orders and the appointment of reform-minded officials.
  • Tax reform will get done and the benefits are not yet priced into markets.
  • Healthcare reform will be complicated and time consuming and it will bring risks to the pricing environment for pharmaceutical stocks.

First things first – deregulation

Notwithstanding the challenges discussed in part one of this Letter, President Trump, assisted by his “Regulatory Tsar”, Carl Icahn, has enormous scope to further his focus on deregulation, not least through the use of executive orders. On his first night in office he made a statement of intent on this with the freezing of any pending regulations from the Obama administration.

Deregulation should be economy and market friendly and can be done by reversing many of President Obama’s executive orders and by issuing a number of his own. Such orders do not require congressional approval and could have widespread effects.

The deregulatory agenda will include approvals for approximately $20 billion of stalled fuel projects such as the Keystone XL and Dakota Access pipelines and the Oregon LNG export terminal, as well as the easing of production restrictions on federal land.

Elsewhere, the Environmental Protection Agency (EPA) will soften enforcement and many observers believe there will be a lighter touch from numerous other agencies such as the Commodity Futures Trading Commission (CFTC), Securities and Exchange Commission (SEC) and the Consumer Financial Protection Bureau (CFPB).

Paul Atkins, former SEC Commissioner and member of Trump’s transition team, has argued that federal agencies issued 392 major rules in the last eight years with an estimated economic impact of over $100 million each annually.

Indeed, if the Mercatus free-market think tank is correct that regulations cost 0.8% of US GDP per annum, the rollback could be potent and very positive for the economy and equity markets. Trump’s campaign promise that every new regulation will be met with the removal of two existing ones should give comfort on his commitment to deregulation.

In addition, Trump’s nominees appear to have a strong deregulatory bias and reforming instincts with Scott Pruitt (EPA), Rick Perry (Energy), Betsy DeVos (Education), Ben Carson (Housing and Urban Development) and Andy Puzder (Labor) being viewed by many as somewhat akin to “foxes in henhouses”.

Cracking the code – tax reform

Tax reform looks like the top priority for Trump and Republican lawmakers and legislation is highly likely. However, as one former staffer on the House Ways and Means Committee put it, the process will be “mind-numbingly complicated”.

Investor disappointment at the timing of legislation is therefore a distinct possibility as the bill’s proponents tackle the numerous complexities of process, policy and scope such as whether to combine corporate and personal changes or do them consecutively.

Indeed, Trump himself has already described as “too complicated” the House Republicans’ border adjustment provision designed to boost US manufacturing by applying a value added tax to imports.

Interest deductibility and capital allowances will also be bones of contention on the corporate side while personal taxation discussions will stir up a hornets’ nest of issues such as mortgage interest deductions and other allowances.

Although the eventual corporate rate is more likely to be 25% than the 15% wanted by Trump, the overall direction of travel is nonetheless clear as the government seeks a more globally competitive corporate rate.

To this extent, investors seem some way from fully discounting the positive effect of lower tax rates, likely higher capital allowances and the economically stimulative benefit of a repatriation provision for overseas corporate cash balances.

This investor wariness may be a function of concerns about border adjustability, both in terms of its economic impact if passed and the challenge of achieving revenue neutrality if it is dropped amid likely Senate opposition and current presidential reservations.

From an investment perspective we feel sure that stock and sector opportunities will emerge as the tax reform process plays out and as markets misprice the cost or benefit to companies of mooted legislative wording.

A complicated procedure – healthcare reform

Delivery of healthcare reform is essential for Trump and the Republicans given the importance of the issue during the election campaign. To this end, Trump signed an executive order on day one instructing federal agencies to “ease the burden of Obamacare”.

Congress has already started the ball rolling for repeal with Trump triumphantly tweeting that “the Unaffordable Care Act will soon be history”. Replacement will be a far more challenging task given its inherent complexity, a lack of consensus among Republicans and the need to win support from enough Democratic senators to gather a 60-vote “supermajority”.

On this latter issue of coalition-building, some Democrats have welcomed Trump’s recent focus on drug pricing, such as his assertion that new bidding procedures are needed because drug companies are “getting away with murder”.

There is therefore a non-trivial possibility that Medicare drug price negotiations might be written into law despite the doubts of Republican House leaders and Tom Price, Trump’s pick to be Secretary for Health and Human Services.

Given this backdrop, we would be mindful of the risks to “big pharma” even after recent underperformance.

If you want to learn more on how Trump's presidency might affect your investments:

 

The views and opinions contained herein are those of Schroders' investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.'s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.