The development of investment returns last year confirmed this relationship again very impressively. Economic momentum slowed with remarkable regularity, while – contrary to intuition – the listed stock, credit, and real estate markets recorded one high after another. The signal was given by the spectacular policy reversal of the US Federal Reserve – instead of at least two expected interest rate hikes, three interest rate cuts were made in 2019.
After more than ten years of abundant liquidity, the limits of the current monetary policy are being openly discussed, not least of all by the central bankers themselves. The heads of the central banks in Europe, the UK, and the US are unabashedly calling on politicians to expand budget deficits quickly and vigorously right now or, at the very latest, when the next signs of economic weakness appear. A consensus is developing that the real economy – rather than the financial markets, which have been booming for a long time – needs to be stimulated by the means of generous fiscal policy. Budget deficits caused by government infrastructure programs are benign, is the common argument. One may assume that politicians and the only in theory independent central banks are thus doing everything possible to promote real economic prosperity.
This sounds promising in principle. Hence, our main scenarios are based on the above-mentioned context and are bullish. As an investor, one should nevertheless ask themselves how strongly one wants to bet on these scenarios and what surprises may be in store.
One set of themes that definitely has the potential to impress the markets comes from governments – the reform of corporate taxation. Largely unobserved by investment strategists and the financial press, the OECD and the G20 countries are working on a globally coordinated reform of the corporate tax system. The existing regulatory framework is essentially based on the principle that corporate taxes are levied in the countries where the companies have a physical presence. In the digital age with globalized supply chains, this seems increasingly outdated. The transition to a system of taxation in client markets is much more in line with real value added. The adjustment of the system is intended to broaden the tax base and make it more difficult to shift profits to low-tax countries. Minimum tax rates are also on the agenda. It is not surprising that the distribution of economic success is being renegotiated. The debt ratios of the industrialized countries have risen continuously since the great financial crisis of 2008. Reliable servicing of this joint debt is only made possible by the manipulated low interest rates. In contrast, the creditworthiness of companies has improved continuously. The corporate sector and especially its owners have benefited from the fact that tax rates have de facto been halved over the last 40 years due to competition. One can certainly argue that a decrease in tax competition would depend on the cooperation of all major players and is therefore hardly feasible. It should be noted, however, that the pot to be distributed will be larger overall and relevant countries will benefit. For practical and political reasons, it will be difficult for hard-up finance ministers to forego higher revenues on their own. This tax reform cannot be implemented overnight. Much remains to be negotiated. However, concrete plans can be expected by the end of 2020; over one hundred countries are working on them. In the long-term, a tendency towards higher tax rates for companies and, consequently, pressure on profit margins can be expected.
What should be done? Selectively diversified multi-asset portfolios that react flexibly to changing market regimes are still a good choice.
Co-Head Multi-Asset Solutions
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