Reports indicate that in recent months, the US dollar rally may be more of a hindrance to emerging market equities than to currencies themselves. The current relationship between the US dollar and emerging market peers, according to Bloomberg, isn’t conforming with conventional wisdom.
Looking at the performance of the dollar, and compared with market equities and currencies, Finance Monthly has heard from a number of sources, in the US and beyond, on the growing relationships between these indices.
Mihir Kapadia, CEO and Founder, Sun Global Investments:
A US dollar rally may be a bigger hassle for emerging-market equities than for currencies these days.
The US dollar has had a rough year till date, having lost nearly 12% of its value this year. This is largely attributed to doubts over the Trump administration’s ability to achieve healthcare reform, tax cuts and infrastructure spending. Confidence on the US administration’s ability to deliver growth-boosting fiscal policies is low, while the positive political and economic situation in Europe has further added to the pressure on the US Dollar. It’s been a reversal of fortunes of sorts as there are somewhat reduced expectations for tighter monetary policy out of the Federal Reserve in the US and higher expectations for more tightening out of the European Central Bank.
The weaker dollar probably does not unduly worry the President as it boosts the US’s export competitiveness. Trump probably views it as a positive as it will boost the US industrial heartlands.
However, this has been a negative factor for overseas investors in US assets, increasing their costs or reducing their profits. The slump in the dollar has already dampened the spirits of currently high performing Asian equities as there is an increasing fear that the weaker dollar could make Asian exports less competitive over time.
A weaker dollar has helped EM bonds as fears that an accelerated monetary policy tightening from the Fed Reserve would put pressure on the dollar-denominated debt of Asian companies, have receded. However, these taper tantrum type fears could represent a risk factor as EM equities are highly correlated with US equities.
Daniel Harden, Head of Desk, Global Reach Partners:
The strengthening US Dollar does appear to be having a proportionately greater impact on emerging market equities at present. The key reason for this is that many emerging economies are pegged to the Dollar so when it goes up in value their own currency follows which can have a detrimental impact on exports. This can also effect emerging market companies with offshore earnings and make foreign debt repayments more expensive.
That said, the US Dollar is still in a relatively weak position and current events suggest it may remain so for the foreseeable future.
The currency had hit a 15 month low against the Euro. It then rallied following the release of an upbeat Non-Farm Payroll (NFP) report earlier this month which highlighted the creation of 209,000 jobs, a figure well ahead of expectations. It also reported a dip in unemployment to 4.3% which matches a 16 year low in the US.
The NFP Report has now provided the market with a good selling opportunity on the US Dollar. It also remains down against all G10 counterpart currencies, impacted by low inflation and interest rate differentials.
Moving forward you cannot ignore the on-gong political situation where there are serious questions of confidence over the ability of the Trump Presidency to deliver a longer term economic boost. While Mr Trump presided over an initial bull run on the Dollar, this appears to be over and there are now emerging signs that the market is losing confidence in both his administration and the Dollar.
The developing situation in North Korea, what effect this will have on the Dollar and the wider economic impact which could result from an escalation in hostilities is a big unknown variable in this whole equation. It is often the case that events which threaten global security will strengthen the US Dollar which is seen as a safer investment.
Looking at the bigger picture where we have an increasingly dovish FED, operating under an unpredictable and sometimes volatile President, with interest rate differentials against it and falling inflation, there is a strong case to suggest the dollar sell off will continue. The potential impact, including the effect this could have on emerging market equites, may therefore be over-stated.
Josh Seager, Investment Analyst, EQ Investors:
Emerging markets are especially vulnerable to a strong dollar when there has been lots of flows into emerging markets prior to the dollar strength. This is what happened prior to the Asian crisis and the taper tantrum. Generally, lots of money flows into emerging markets because of depressed returns elsewhere, imbalances build (for example an over-reliance on foreign funding), the dollar gets stronger and then investors take out their money at the same time causing a big sell off.
There are few signs of such a build-up of capital. The MSCI EM index has underperformed the MSCI World index by 50% over the past five years and flows have been coming out of emerging markets as a result. As a consequence, we aren’t so worried about a US Dollar related emerging market sell off ourselves.
The dollar is negatively correlated with commodity prices so if strong dollar causes weak commodities this can hurt emerging market equities. Emerging markets also benefit from global growth so if the dollar is strong and trade is good there is unlikely to be an issue.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
Below Sam Bennett, COO at Frontierpay, provides Finance Monthly with a brief overview on UK inflation over the past few weeks, looking at the current state of play, the evolution of optimism and the overall position of the pound among global currencies.
Mark Carney must have breathed a sigh of relief from his office in the Bank of England when the news reached him just a few short weeks ago that UK inflation had fallen to 2.6%; contradicting market expectations that it would remain at, or even rise above May’s figure of 2.9%
The rate at which inflation rose over the last year had been better than predicted, after hitting what was already a 20-month high in June 2016, when the UK voted to leave the European Union. The CPI’s unexpected drop in July, which came largely as a result of lower oil prices reducing the cost of petrol and diesel, was therefore very welcome.
While the fall in inflation was quickly hailed as good news by many businesses and everyday consumers, sterling’s position in the currency market was hit hard, with a slowdown of the domestic economy creating significant downward pressure.
The 0.3% fall led to an immediate drop in the value of the pound, which landed at €1.12 against the single currency and shed more than a cent against the dollar. As sterling continued to feel investor pressure in the following days, the pound fell another 1% against the euro and found itself sitting below $1.30.
Today, a little over three weeks since the fall in inflation was first announced, the state of play for the pound isn’t looking any more encouraging than it was in those first few troublesome days.
Despite German industrial production falling unexpectedly, an event which we might have expected to provide some relief, sterling has not only remained under pressure, but has actually slipped further against the euro and dollar. Even with the most recent data from the Eurozone being weaker than many analysts predicted, potential investors are still wrestling with the uncertainty of the UK’s weak UK inflation data.
It should be pointed out that there is still some relative positivity in the investor community, thanks largely to robust global growth rates. Equity markets are sitting at fresh highs, with global indices rising, on average by 23% this year so far. Cause, therefore, for some optimism.
For the time being, however, the UK continues to look like the perceived weaker cousin, in comparison to the other major global currencies. We’ve seen several attempts to gain ground against the euro and the dollar pushed back, and live prices have settled at levels of around €1.10 and $1.30. As lower inflation numbers continue to weigh heavily on the pound, a rapid turnaround isn’t looking very likely.
As part of Finance Monthly’s brand new fortnightly economy and finance round-up analysis, Adam Chester, Head of Economics & Commercial Banking at Lloyds Bank, provides news and opinions on the rise in inflation, the UK’s weakness in productivity, and employment & GDP.
The anniversary of the UK’s decision to withdraw from the European Union has now passed, and who could have imagined the political fallout that would ensue?
One year on, the formal Brexit negotiations have only just begun, yet the nature of those negotiations and their ultimate destination remain unclear.
Despite all this uncertainty, it is remarkable how well business sentiment and the economy has held up.
The resilience of the UK economy however, and UK financial markets, has prompted a very different response from the Bank of England than the one that followed the EU Referendum.
While the bank came out ‘all guns blazing’ last summer, the focus now is on when it will start to take that stimulus away.
Doves taking flight?
Bank of England officials have signalled that above-target inflation may not be tolerated for much longer.
Even Governor Carney – one of the more dovish members of the UK rate-setting committee – has rowed back a little on his earlier stance, suggesting that if the balance between growth and inflation continues to shift, ‘some removal of monetary stimulus’ is likely to be necessary.
The markets now have the August MPC meeting in their sights. That is when the Bank of England takes another detailed look at its GDP and inflation forecasts.
By then, not only is inflation likely to be much higher that the bank was previously forecasting in May, but the committee may also have to factor in the risk of some loosening in fiscal policy.
The decision will come down to the MPC’s assessment of the trade-off between growth and inflation.
BoE Deputy Governor Broadbent noted in a recent interview that there were many ‘imponderables’ and that he was ‘not ready’ to support a rate hike.
Meanwhile, Ian McCafferty underscored his credentials as the most hawkish member of the BoE’s rate-setting committee, arguing not only for an immediate quarter-point rise in interest rates, but also for the BoE to consider reversing its money-printing programme earlier than planned.
The productivity problem
While all eyes are on Brexit, it is easy to miss what is arguably an even bigger challenge for the UK – the weakness of productivity.
UK productivity (as measured by output per hour) contracted by 0.5% in the first quarter of this year, leaving it at its lowest since before the 2008 financial crisis.
By any measure this is a shocking performance.
There are various explanations for the UK’s disappointing productivity, and some are more benign than others.
Part of the reason may be simple mismeasurement. Recording the productivity of economies such as the UK with large service-sector industries, particularly financial services, is inherently difficult.
As the UK’s official statistics indicate, productivity in some sectors, including financial services, has performed significantly worse than other non-financial service sectors over the past decade. But this does not tell the whole story.
Productivity may have also deteriorated due to changes in the composition of capital and labour.
Since the financial crisis, low wage growth and heightened economic uncertainty may have encouraged more companies to hire new workers to drive output growth rather than undertake productivity-enhancing capital investment.
Going for growth
The rise in the UK’s GDP over the past decade has been driven, almost exclusively, by increases in employment and hours worked.
The UK’s latest labour market data underscores this point. Total employment grew by a stronger-than-expected 175,000 in the three months to May, while the unemployment rate dropped to a new multi-decade low of just 4.5%.
At the same time, pay pressures remain benign, with annual growth in overall pay slipping from 2.1% to 1.8% - the first time it has been below 2% since February 2015.
Based on current data, GDP is likely to have expanded by 0.3% in the second quarter, while total employment is predicted to have risen by 0.3%. As a result, productivity growth is projected to be zero.
The combination of a tightening labour market, weak productivity growth and benign pay pressures pose a major dilemma for the Bank of England.
For now, we expect the Bank to keep its powder dry, but it won’t take much further sign of economic strength to persuade it to reverse last August’s quarter-point rate cut.
As part of Finance Monthly’s brand new fortnightly economy and finance round-up analysis, Adam Chester, Head of Economics & Commercial Banking at Lloyds Bank, provides news and opinions on volatility in the uncertain market and the prospect of a hike in interest rates, both in the UK and the US.
Clearly, the last two weeks have seen political shocks with potentially far-reaching consequences for the UK’s economic outlook.
The aftermath of the General Election has introduced new uncertainty over the implications for Brexit though, so far, financial markets have taken it in their stride.
However, until there is a clearer sense of what the new minority government can achieve, UK financial markets and the pound are likely to be prone to sharp bouts of volatility.
Three wishes
The outlook for the UK’s Bank Rate seems to be changing by the moment.
The surprisingly close June vote on interest rates by Bank of England policymakers saw three of the rate-setting committee back a rise.
Governor Carney seemingly attempted to put a lid on the discussion by stating that now was not the time to raise rates. However, Andy Haldane, the Bank’s Chief Economist, subsequently said he was now close to voting for an interest rate hike.
This is particularly significant as, until now, Haldane was considered to be the arch dove amongst the Bank’s rate setters. Moreover, it is the first sign of a divergence in views between the current permanent Bank employees on the committee.
Up until now it’s only been the so called external members who have voted for a hike. Is that about to change?
Markets certainly think there is something new in the air, as can be seen by the implied probability now put on a 2017 interest rate hike. That has gone up from below 10% just over a week ago to about 50%.
What is most surprising about this sudden shift in expectations is that economic conditions are arguably little changed. Once you also factor in political uncertainty, including the unexpected result of the general election, then on the face of it, the case for staying put seems strong.
But the hawks amongst Bank rate setters had previously indicated that they have limited tolerance for above-target inflation.
Close to the limit
Two factors suggest that the limit may be close to being breached.
First, Kristin Forbes, one of the hawks, has noted in recent research that the effects of an exchange rate generated inflation shock can persist. This questions whether the Bank is right to prioritise domestic pressures.
Second, the eventual impact on wages of what looks to be an increasingly tight labour market remains a concern. The UK unemployment rate is now at its lowest level since the mid-1970s and there are signs that this is having an impact.
On balance, we expect the Bank to keep interest rates on hold for now. Nevertheless, this is a closer call than for some time.
Over the next few weeks, markets will be paying particular attention to any comments from those Bank policymakers who have yet to make their position clear.
It will be an interesting run up to the next policy announcement on 3rd August.
Fed up again
In the US, a quarter-point rise in interest rates was widely expected, and subsequently delivered.
The Federal Reserve also stuck to its previous ‘dot plot’ forecast to raise interest rates, anticipating another quarter-point rise this year, and three more in 2018, with the key policy rate expected to settle around 3.0% in 2019.
In pre-announced plans, the Fed intends to start unwinding its balance sheet. For the moment, it anticipates deflating its asset holdings by $10bn a month from later this year, rising in small increments every three months to $50bn
Despite this, US financial markets may have other ideas – as they continue to pretty much ignore the Fed’s guidance. The markets are only fully priced to one more quarter-point rise by the end of next year.
With signs of more mixed growth emerging recently and a weakening of core inflation, the markets clearly think the Fed has got it wrong.
This misalignment can only last so long. Either the Fed will have to eat humble pie, or the US, and by extension global, bond markets could be in for a much more testing second half.
With socio-political uncertainty reigning the decisions of businesses and banks, currency fluctuation is unpredictable and both the USD and GBP have been undergoing copius periods of pressure. Here Bodhi Ganguli, Lead Economist at Dun & Bradstreet gives Finance Monthly an updated run down on the currencies and their status moving forward.
An investigation of the movements in the dollar-pound exchange rate needs to balance short run fluctuations against the medium to long term fundamentals. While day-to-day volatility in the currencies can produce financial gains for a subset of finance professionals like currency traders, the underlying trends in the exchange rate are far more important for the overall growth of the two economies, and eventually of more significance to businesses.
Note that the USD-GBP exchange rate is a “relative price”, or in other words, it is the price of one currency in terms of the other currency. As such, all movements in the exchange rate are relative to each other. Therefore, factors that have an impact on either the USD only, or the GBP only, will end up producing fluctuations in the exchange rate. The latest phase of weakening in the GBP relative to the USD began in earnest after the Brexit referendum in June 2016. The UK’s decision to exit the EU was seen as detrimental to growth in the near to medium term, causing erosion of investor confidence in the GBP. The immediate reaction was a slump in the relative price of the GBP; in less than a month the value of the GBP fell from USD1.45 to USD1.30 or nearly an 11% depreciation in the sterling. Since then, the GBP has lost even more ground vis-à-vis the USD.
The USD’s behavior over the last couple of years was also a factor behind the post-Brexit slump in the GBP. The drop in the pound happened to coincide with one of the strongest phases of the dollar in recent history. Against the currencies of a broad group of major US trading partners, the USD started appreciating sharply and steadily in mid-2014, and by the time of the Brexit vote in June 2016, it was already 18% stronger compared with July 2014. Since then, the USD gained even more thanks to investor optimism following the election of the Trump government.
More recent trends in the USD and GBP offer clues to the near-term movement of the exchange rate. The pound will remain under pressure during the course of the Brexit negotiations that have just commenced primarily because there is significant uncertainty associated with them. Brexit remains a systemic risk that will weigh on growth in the near term. More importantly, investor sentiment will be subject to frequent changes until Brexit is complete and any perceived increase in risks will weigh on the pound. This will tilt the exchange rate in favor of the USD, also, partly because the USD is a safe haven currency that investors flock to whenever there is an increase in geopolitical uncertainty. Over the longer run, we expect the pound to weaken modestly against the euro (the currency of the UK's most important trading partner) until 2021, but this assessment assumes that elections on the continent will be won by pro-European parties and the Greek debt crisis will not return. Against the dollar, a very modest strengthening should set in towards the tail end of this decade but political risk in the wake of the Brexit negotiations has the potential to impact on the exchange rate. In any case, currency volatility will be a bigger issue than in previous years, also caused by political events on both sides of the Atlantic and the Channel.
Monetary policy in the two countries will also be a driver. The US Federal Reserve has already started the process of monetary policy normalization—the only major western central bank that has started raising interest rates from the ultra-accommodative lows necessitated by the Great Recession. On the other hand, the Bank of England launched the latest round of monetary stimulus right after the Brexit referendum and continues to support the economy with record low interest rates. The spread between the US and UK interest rates will also favor the USD, although the USD has its own issues to worry about there. Following the latest rate hike by the Fed in mid-June, the dollar remained relatively subdued. There are two main reasons why the link between a Fed rate hike and dollar appreciation seems broken for now: one, investors are assigning a low probability to aggressive rate hikes by the Fed given the recent weakness in US inflation data, and secondly, while investor optimism is still there, it is now widely accepted that the Trump administration’s fiscal policy measures, like tax reform and deregulation, will not add to US growth in 2017. In fact, implementation risk remains high given the level of disagreement on key issues among Congressional Republicans.
Ironically, while currency weakness fundamentally signals weakness in a country’s economic prospects over the longer run, it could benefit an economy in the short run. This is clearly evident from the gains in manufacturing seen in the UK, thanks to the weakness of the pound. However, there are downside risks from the weak pound, like rising inflation, which will weigh on consumers and prompt the BoE to raise rates. Similarly, no one seems to mind the lackluster reaction of the USD to the Fed rate hike. Manufacturing benefits, corporate profits gain, and even the Fed might not be too worried as the weak dollar will boost inflation and help it stay on track to raise rates. Eventually, of course, economic fundamentals will take over and the exchange rate will reflect the varying economic prospects of the two countries.
PwC's head of research and analysis of fintech, Aaron Schwartz shares his views on what areas are more likely to attract investors' attention in the future. He talks to The Banker's Silvia Pavoni during Swift Business Forum New York.
Steve Biggar, Director of Financial Institutions Research, Argus Research, discusses what's driving the recent pullback in US bank stocks and which names Argus has "buy" opinions on.
According to new research released this week by Dreyfus, a pioneer in US investing, half of individual investors (49%) have indicated they have yet to take any action to reevaluate their investment approach in light of the possibility of a shifting investment landscape, as we head into the eighth year of the economic recovery.
"As long-term risk/return expectations have shifted with an increase in inflation, the rise of US nationalism and record-low volatility, investors would be well-served to reevaluate their portfolios in light of changed circumstances to determine if they will continue to meet their investment objectives," said Mark Santero, Chief Executive Officer, The Dreyfus Corporation, a BNY Mellon company.
The "Helping Meet Investor Challenges Study" surveyed 1,250 investors with $50,000 or more in investable assets on their approach to investing. This is the first release of survey data that explores all elements of the group's investing lives, including engagement with investment professionals, portfolio allocations and appetite for risk. The study also surveyed 200 independent and institutionally-based advisors regarding the investing relationship between advisors and clients.
Older Investors Ignoring Past Market Precedents in Adjusting Portfolios
Older investors have had an opportunity to weather a variety of stock market highs, such as the bull markets from 1987-2000 and 2009 to the present, and lows, such as the savings and loan crisis in the 1980s, the stock market crash in 1987 and most recently the financial crisis of 2008. Yet, even with this past knowledge in the rearview mirror, the survey reveals:
In comparison, younger investors who experienced the 2008 market meltdown and who began their savings efforts in the earlier part of their careers demonstrated a forward-thinking approach to reevaluating their portfolios. This generation of investors between the ages of 21 and 34 indicated the following:
"Our survey revealed that younger investors have demonstrated in greater numbers a more proactive approach to reassessing their portfolios and seeking out their advisors for counsel, some of whom might lack the historical market experience and accumulated wealth of older investors," said Mark Santero.
Mass Affluent Investors Slow to Take Action on Their Portfolios
The survey also looked at the investment actions taken by mass affluent investors, those who had investable income between $250k and $2.5 million. The survey found nearly half of this audience had work to do in reviewing their portfolios and how more than a third had decided to do nothing with their portfolios:
Investors Look to Advisors in Navigating the Way
Despite the last eight years of a US bull market, uncertainty is very much a reality in U.S. and global markets.
Yet a majority of investors remained on the sidelines, the survey found:
Santero added, "We believe investors who don't work with a professional advisor could greatly benefit from the insights an advisor can provide in tailoring a goals-based approach for their individual circumstances against today's investing environment of uneven economic growth. Options might include diversifying their US exposure with global fixed income and equities or considering dividend or alternative investing strategies."
Those individual investors who worked with an advisor had a greater likelihood of adjusting their portfolios. The findings revealed that:
(Source: Dreyfus)
The global trend of the past few years towards a "low-rate, broad-base" business tax environment continues, as worldwide economic growth shows no signs of improving and countries introduce new or improved incentives to compete for business investment that will stimulate growth.
Canada isn't immune to global trends, but its tax policy direction is hard to predict at the moment due to the uncertainty around tax policy reforms being considered in the US. This is according to the EY Outlook for global tax policy in 2017, which combines insights and forecasts from EY tax policy professionals in 50 countries worldwide.
"Tax reforms emerging in Europe and the U.S. are putting pressure on governments to find creative ways to compete for business investment," says Fred O'Riordan, EY Canada's National Advisor, Tax Services. "Canada has improved its international tax competitiveness over a number of years, but it's at risk of losing some of this ground, in particular if the United States goes ahead with a tax reform package that includes significant rate reductions."
Competition for investment globally
With the implementation of the G20/Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) recommendations, governments are now more compelled to compete with each other and attract investment through different tax changes. According to EY's report, of the 50 countries surveyed, 30% intend to invest in broader business incentives to stimulate or sustain investment, and 22% plan to introduce more generous research and development (R&D) incentives in 2017.
But Canada is bucking the global trend of investment-stimulating policy. Here, the government has been more focused on the personal income tax side and redistributing the tax burden so the highest income earners bear more and middle income earners bear less.
Tax reform in the United States may impact Canada
An increased likelihood of tax policy reform in the US is strongly influencing both the Canadian and global tax policy outlook. With a Republican President and Republican control of both houses of Congress, the probability of a reform package being implemented is higher than in previous years. As a result, Canada and many other countries are taking a "wait and see" approach until new legislation is adopted in the US before they commit to any reforms themselves.
"A "border tax adjustment mechanism" is currently proposed as part of the tax reform package in the US," says O'Riordan. "Because our two economies are so closely integrated, this could have a significant impact on cross-border trade in both goods and services with our closest neighbour. Any Canadian company doing business with the US definitely ought to pay attention to upcoming changes in the US."
Corporate income tax rates
Of the 50 country respondents, 40 report no change or anticipated change to their national headline corporate income tax (CIT) rate in 2017, but rates continue to decline in a number of jurisdictions, particularly in Europe. Canada is one of only two countries where the rate actually increased (the average combined federal/provincial rate increased marginally -- by 0.2 percentage points). This in itself is unlikely to deter investment, but is still slightly out of step with global peers.
(Source: EY)
British entrepreneurs are being offered the chance to develop financial services ideas in one of the top financial regions in the US, with a $100,000 (£77,000) equity-based grant and a package of support for growing businesses.
The initiative aims to bring up to twelve of the most promising emerging financial companies in the world to Ohio and help them boost their growth beyond the start-up stage. Equity-based grants of $100,000 per firm plus coaching, office space, visa support and a strong business network are all being provided through the accelerator Fintech71.
Valentina Isakina, Managing Director for Financial Services and Select HQ Operations at JobsOhio, said: “Ohio looks ahead to the future by investing in technologies of the next generation. Our financial services sector is one of the strongest in the world, and it is always actively seeking innovative ideas and partnerships. Here people are more approachable and doing business is easier, so these innovative companies will have a better chance to blossom into the financial stars of tomorrow. JobsOhio is happy to support this innovative industry effort.
“Getting beyond the start-up phase is always difficult even when entrepreneurs have a great idea and have managed to get their business going, so the financial services industry wants to give them a helping hand by creating Fintech71. By bringing them here to enjoy Ohio’s support and hospitality, they will make contacts that will last a lifetime and benefit everyone.”
Fintech71 is aimed at start-up and scale-up businesses from all over the world which have matured enough to present a well-thought-out concept to test with a corporate partner or a market-ready business model. The application deadline is July 17 via www.fintech71.com.
The accelerator has a not-for-profit model and will negotiate a customised, entrepreneur-friendly equity-based participation in exchange for a grant of US $100,000 and access to the accelerator program for each of the selected companies. The finalists will be invited to the state capital Columbus to receive coaching from leading experts of the industry from mid-September to mid-November, in order to further develop their business ideas.
Additionally, the selected start-ups will get the opportunity to build relationships with the sponsor businesses, which are well established in Ohio and throughout the USA, and to network with mentors, partners, and customers. The selected start-ups will have access to free office space in the city centre of Columbus, with foreign businesses will be supported with their visa application.
Some 270.000 people, nearly the size of NYC’s workforce, work in the financial industry in Ohio, one of the largest in the USA. Ohio is also an innovative and successful hub for a large number of other industries, including automotive, aerospace, mechanical engineering, and chemicals. The state is among the top five US states for Fortune 500 and Fortune 1000 headquarters.
Fintech71, named as a nod to the cross-state highway I-71 connecting Ohio via its three largest cities, is backed by leading enterprises, banks and insurers from Ohio, like KeyBank, Huntington Bank, Grange Insurance, Progressive Insurance and Kroger, the largest food chain in the USA. JPMChase is also supporting the program, leveraging its large technology presence in Ohio. JobsOhio, the innovative non-profit economic development corporation, is supporting Fintech71’s operations along with its industry expertise, state and national contacts.
“Fintech71 and Ohio are ready to compete on a global scale given the alignment of the state, the private sector and its entrepreneurial ecosystem,” added Matt Armstead, the executive director for the accelerator.
(Source: JobsOhio and Fintech71)
Androulla Soteri, tax development manager at MHA MacIntyre Hudson below discusses the consequences of the US President’s potential implementation of tax reform in the country, and the impact it could have on UK business.
Corporation Tax (CT) has been an important part of the election manifestos, and we now find ourselves in a coalition of two parties supporting a move towards lower CT rates. This makes it clear which direction the new government will decide to go in.
The main argument for dropping CT rates is to make the UK a more attractive place for multinationals to locate business. This in turn increases the job-pool which raises further tax revenue in the form of National Insurance contributions, and consequently VAT as consumers have more disposable income to play with. In over a decade, CT has never made up more than 11% of total tax take. Given its relative lack of significance, there’s a strong argument to suggest an overall benefit in reducing it.
One of the arguments against a reduction is that if big multinational companies were forced to pay their fair share of CT, this would help reduce the budget deficit and national debt, and also contribute to public services such as the NHS, schools and policing.
But it’s also worth taking a look at the US, which has one of the highest rates of CT in the world at 35%. One of Trump’s intentions is to drop the rate to 15%, to bring US companies back home. If this happens, US businesses could lose interest in investing in the UK, especially with Brexit looming on the horizon. Instead, they could look to repatriate headquarters, increasing employment of US citizens and consequent tax revenues associated with it.
If Trump’s plan is a success, the UK could be shaken hard over the next few years, especially in light of ongoing Brexit uncertainties. Lowering CT rates in the UK may therefore be an incentive for companies to remain within a benign competitive UK tax system.
The task of running the UK over the next two years is unenviable. But if the Government sticks to its plan of lower CT rates, we’ll certainly see clear evidence within the next few years of whether this is good or bad for the economy.
Below, Tamara Lashchyk, a Wall Street Executive and Business Coach, talks to Finance Monthly about the current state of markets in the US and the impact that Trump's Presidency will have on the strength of America’s economy. Tamara has 25 years of experience working at multiple Wall Street investment banks including JP Morgan, Bank of America and Merrill Lynch just to name a few. She also recently authored the book “Lose the Gum: A Survival Guide for Women on Wall Street.”
Over the last 12 months the US Equity Markets have shown steady signs of growth until last November when the US elections sent the stock market soaring into another stratosphere. A 16% market surge over the last six months could have an intoxicating effect on investors, but one should heed a word of warning about using market performance as the sole barometer of economic health. With GDP growth hovering just below two%, the stock market has fast outpaced the growth of the real economy.
Although corporate profits are a contributing factor to this bull-run, much of the current market rally has been fueled by the economic optimism generated by the Trump campaign and his promise to deliver a pro-business agenda. Any interference in Trump’s ability to deliver against that agenda could halt this market momentum and even send it towards a decline.
But in the wake of an administration riddled with controversy and scandal, the private sector sits anxiously awaiting, to see on how much of this promise Trump can actually deliver. Topping the heap of the Trump strategy is Tax-Reform and a reduction of the corporate tax rate which would stimulate profits; repeal of onerous government regulations particularly in the banking sector; and renegotiation of trade deals.
But the clock is ticking and Trump’s time horizon could be much shorter than the four year term of a presidency. If the all stars and planets align for Trump then he will have the full duration of his time in office to work with a Republican Congress. But with mid-term elections less than two years away, Trump’s opportunity to deliver may evaporate just as they did for President Obama when he lost both the Senate and the House.
At this point however, the mid-terms seem like a distant concern while the greater issue is the dark cloud of political smoke that engulfs this Administration. Whether or not there is actually fire remains to be seen, but in the meantime all the political noise creates an unproductive distraction that pulls Trump’s focus towards political warfare rather than delivering against his pro-business agenda. If any of the countless allegations are proven to have merit, a Trump impeachment could also be on the horizon.
To understand the impact that a disruption of Trump’s presidency may have from an economic standpoint, one should take a closer look at the current state of the economy. If you peel away the market enthusiasm and look at the economic fundamentals, the real economy is on solid ground and has been for quite some time. Unemployment continues to steadily decline although recent figures show signs that the decline is tapering off as underemployment and non-farm payrolls have reported softer than expected numbers. Caution regarding the slowing pace of growth is already priced into the market as seen by the return of the 10 Year Treasury yields back to their November levels. Inflation is under control eliminating the need for aggressive rate hikes by the Fed but a quest for normalization is still at the forefront of the Fed agenda as we balance against the danger of falling into a deflationary trap. Forcing a rate hike however, could send the economy into a tailspin so the Fed will likely play it safe by running the economy hot and dealing with the consequences of more money supply in the market.
So all in all, the fundamentals paint a solid economic picture, but they by no means match the gangbuster returns of the markets. Although the stock market is one of the leading indicators, in the past it has proven itself to be a cautionary tale, especially when considered in isolation. It is therefore important to look beyond the superficial gains of the recent market rally when evaluating the strength of the US economy.
