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Wed, 22nd February 2017

Anirudh Sethi Report

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Archives of “public finance” Tag

New global exchange system to tackle tax avoidance

Tax authorities around the world will soon get a powerful new weapon in the fight against tax avoidance.

Next year will see the launch of the Common Reporting Standard, a new global system for the automatic exchange of financial account information between national revenue bodies. Set for launch in September 2018 the CRS has already been hailed as a game-changer.

 The system represents the international community’s response to criticism of rampant tax avoidance through offshore accounts in the Panama Papers.

“Assets held by wealthy people will become fully visible,” said senior Japanese tax official. “Its power will be tremendous.”

That view appears to be no exaggeration.

Established by the Organization for Economic Cooperation and Development, the system automatically provides for the exchange of information on accounts across jurisdictions.

The data will include the names and addresses of account holders as well as the account balances and interest and dividends earned on the holdings.

Fed’s Kashkari Says “Stock Prices Appear Somewhat Elevated”, Explains “What Might Be Wrong”

This morning, Minneapolis Fed Chairman Neel Kashkari penned an essay “Why I Voted to Keep Rates Steady” in which the former Goldmanite says that while core inflation “seems to be moving up somewhat, it is doing so slowly, if at all.”  He adds that “financial markets are guessing about what fiscal and regulatory actions the new Congress and the Trump administration will enact. We don’t know what those will be, so I don’t think we should put too much weight on these recent market moves yet.”

Repeating a on often heard lament about the lack of rising wages, Kashkari points out that “the cost of labor isn’t showing signs of building inflationary pressures that are ready to take off and push inflation above the Fed’s target” and adds that “it seems unlikely that the United States will experience a surge of inflation while the rest of the developed world suffers from low inflation.”

Union Budget 2017: Big cheer for taxpayers with income below Rs 5 lakh! Tax rate slashed to 5%

Union Budget 2017: Finance Minister Arun Jaitley in his speech announced that he will reduce the tax rate of individuals earning between Rs 2.5 lakh to Rs 5 lakh to 5% from the current 10%. This would also translate into an additional benefit of Rs 12,500 for tax payers even beyond Rs 5 lakh.

To part finance the additional burden on the government for this tax relief, FM Jaitley announced a surcharge of 10% for those earning between Rs 50 lakh and Rs 1 crore.

FM Jaitley also announced some changes that would encourage affordable housing. The holding period for immovable property for LTCG has been reduced to 2 years. FM Jaitley said that his tax proposals are directed at providing relief to the middle class and to stimulate growth. Jaitley cited a series of figures to show that India is largely a tax non-compliant economy.

Tax and industry experts were already expecting that to assuage the demonetisation pains of the common man and alleviate their sufferings, some tax reliefs may be provided in the budget. Even Finance Minister Arun Jaitley had hinted in his speeches earlier that the tax burden on taxpayers may be lowered due to higher tax revenues being collected on account of cashless systems.

Fiscal deficit target of 3% for 2017-18 stiff at this juncture: Crisil

Fiscal deficit target of 3 per cent for 2017-18 looks difficult as the debt dynamics of the country show “stickiness”, rating agency Crisil said on Saturday. “Three per cent looks like a stiff task at this juncture for fiscal deficit. When the economy needs help, we need to move to a range that is going to provide the government some flexibility,” D.K. Joshi, Chief Economist at Crisil, told BTVi in an interview.

“The debt dynamics show stickiness. We have not been able to bring down the debt-GDP ratio, which is quite high for India. It complicates matters,” Joshi said. The economist said that the government needs to come up with substantial steps to push up the revenues to maintain fiscal prudence for the next two to three years.

The borrowing target, however, he said is not expected to be very large and in line with the fiscal deficit target. “The borrowing will not be too large if fiscal deficit target is three per cent. I don’t see borrowings as significant or at the level that would spook the stock market and reverse the gains.”

In FY17, spectrum or excise duty on oil that has led to revenue windfall are all temporary measures and may reverse in the coming fiscal.  Joshi said that the concern is to improve the tax-GDP ratio in the next 2-3 years.  “Let’s see how creative the Budget is in extracting higher compliance from individuals. Though there is not much scope to raise the tax-GDP ratio in the short run,” he said. “In terms of Income Declaration Scheme (IDS), I don’t see much cushion coming from these schemes. They can’t continue for ever, they should be leveraged for increasing compliance,” he added.

World Bank latest reports says global growth to accelerate slightly

World Bank’s latest Global Economic Prospects report … headlines:

 
  • Forecasts global real GDP growth at 2.7% in 2017 vs 2.3% in 2016
  • Forecasts advanced economies’ growth at 1.8% in 2017 (vs 1.6% in 2016)
  • Emerging/developing economies’ growth at 4.2% in 2017 (3.4% in 2016)
  • Forecasts US growth at 2.2% in 2017 (vs 1.6% in 2016) … they say their forecast excludes effects of any policy proposals from trump administration

More:

  • Challenges for emerging market commodity exporters are receding, while domestic demand solid in emerging market commodity importers
  • Fiscal stimulus in US could generate faster domestic and global growth, but extended uncertainty over policy could keep global investment growth slow
  • Forecasts China’s growth slowing to 6.5% in 2017 (from 6.7% in 2016)
(Headlines via Reuters)
 
The World Bank looking at the recovering oil and commodity prices, noting this eases the pressures on emerging-market commodity exporters. Expects the recessions in Brazil and Russia to end.
As always the Bank notes uncertainties in its forecasts (all forecasters should), with upside uncertainty (in the short term at least) on US potential increased fiscal stimulus, tax cuts, infrastructure spending.  Looking further out, though, a surge in debt load, higher interest rates & tighter financial conditions would have adverse effects.
Also downside potential on a more protectionist trade stance.

How to Become a Trillionaire and Other Thoughts

Grab one of these:

zimbabwe_jan7

Careful what you wish for central bankers and fiscal policy makers.  Though we don’t see signs of “rollover risk” in any of the G5 or G20, it’s all about confidence and you know what Joe said about confidence:

Confidence is a very fragile thing.  – Joe Montana

.The World Economic Forum reports this about Zimbabwe’s ghost of hyperinflation past,

Zimbabwe was once so gripped by hyperinflation that the central bank could no longer afford paper on which to print practically worthless trillion-dollar notes. 

The government reported in July 2008 that Zimbabwe was experiencing inflation of 231 million percent (231,000,000%). However, the Libertarian think tank, the Cato Institute, believes that the real inflation rate was 89.7 sextillion percent or 89,700,000,000,000,000,000,000%.

It is interesting to note that the country is now grappling with the opposite problem.

Like Britain, Japan, the US and other nations dealing with the consequences of weak demand and cheap oil, Zimbabwe is threatened more by the prospect of falling prices. But that doesn’t mean its people are ready to trust that hyperinflation won’t happen again.

Saudis Forecast $51 Oil In 2017 Rising To $65 By 2019; Will Spend 20% Of Total Budget On Military

After suffering two record budgets shortfalls in 2015 and 2016 as a result of plunging oil prices, and which nearly brought both Saudi Arabia’s economy and banking sector to a standstill, not to mention billions in unpaid state worker wages at least until generous foreign investors funded the Kingdom’s imminent cash needs with its first, and massive, bond sale ever, today Saudi Arabia released it budget outlook for the next year.

And while the Saudis believe the country’s budget deficit will fall modestly next year even with an increase in spending, it is still set to be a painful 8% of GDP suggesting the Saudi cash burn will continue even with some generous oil price assumptions.

The budget deficit for 2017 is expected decline 33% to 198 billion riyals ($237 billion), or 7.7% of GDP, from 297 billion riyals or 11.5% of GDP in 2016 year and 362 billion riyals in 2015, the Finance Ministry said in a statement on its website on Thursday. In 2016, the finance ministry said its spending of 825 billion riyals ($220 billion) was under the budgeted 840 billion, and the 2016 budget deficit came to 297 billion, below the 362 billion in 2015.

 

Goldman Raises S&P Target To 2,400 On “Trump Hope”

Having warned for nearly all of 2016 that the market is getting ahead of itself on the back of median P/E multiples that are higher than 99% of all historical reading, Goldman chief strategist David Kostin stubbornly kept his year end S&P target at 2,100 on valuation concerns.

Today, however, with oil soaring and the S&P at all time highs, he finally threw in the towel as a result of the Trump victory, and in a report Kostin writes that the Trump “Hope” will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400.  However, at that point, “less-than-expected tax cuts and higher inflation and interest rates will limit both upward EPS revisions and any P/E multiple expansion. S&P 500 will end next year at 2300, reflecting a price gain of 5% and a total return of 7% including dividends.”

Here is the summary from Goldman:

  • US equity investors have focused “more on hope than n fear” since Donald Trump’s election. Ironically, many commentators believe his campaign rhetoric focused “more on fear than hope.” In 2017, we expect the stock market will be animated by competing views of whether economic policies and actions of President Trump and a Republican Congress instill hope or fear.
  • “Hope” will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400. The inauguration occurs on January 20 and our Washington economist expects much legislation will be proposed during the first 100 days. The prospect of lower corporate taxes, repatriation of overseas cash, reduced regulations, and fiscal stimulus has already led investors to expect positive EPS revisions. Instead of our baseline adjusted EPS growth of 5% to $123, growth could accelerate to 11% and reach $130, which would support a P/E multiple above 18x. Top “Hope” investment recommendations: (1) Cyclicals vs. Defensives; (2) Stocks with high US versus foreign sales exposure; and (3) High tax rate companies.
  • “Fear” is likely to pervade during 2H and S&P 500 will end 2017 at 2300, roughly 5% above the current level. Our economists expect inflation will reach the Fed’s 2% target, labor costs will be accelerating at an even faster pace, and policy rates will be 100 bp higher than today. Rising inflation and bond yields typically lead to a falling P/E multiple. Congressional deficit hawks may constrain Mr. Trump’s tax reform plans and the EPS boost investors expect may not materialize. Potential tariffs and uncertainty around other policy positions may raise the equity risk premium and lead to lower stock valuations in 2H. The median stock trades at the 98th percentile of historical valuation based on an array of metrics. Top “Fear” investment recommendations: (1) Low vs. High labor cost companies; and (2) Strong vs. Weak Balance Sheet stocks.
  • Money flow represents a potential upside to our baseline forecast. Equity mutual fund and ETF inflows may benefit as investors lose money owning bonds. After years of active management underperformance and outflows, higher return dispersion will increase the alpha opportunity for investors skilled enough to capture it. Economic policy uncertainty and the later stages of the economic cycle are typically associated with higher stock return dispersion

Why Deutsche Bank Thinks The S&P Is Going To 2,500 Next

For the past year, Deutsche Bank was one of the most stubbornly pessimistic banks. Then, overnight, everything changed for one reason: Donald Trump.

The German bank laid out its 180-degree change in opinion in a 30-page Friday note titled “Trump: the huge picture for stocks”, in which it revealed that it now expects the S&P to easily rise to 2,250 by Trump’s inauguration, and then rise to 2,500 by 2018 “before suffering its next bear market.” 

While not necessarily the “huge picture”, here is the big picture summary of DB’s note: 

In the first week of President elect Trump, most of our investor conversations centered on their concerns about a higher fiscal deficit lifting Treasury yields and pressuring PEs and a stronger dollar/ weak oil prices pressuring the EPS outlook and the possibility of protectionism. While we don’t ignore such risks, we think the market is under appreciating the likely big boost to S&P EPS from a lower corporate tax rate and the boost to Bank profits from rising yields (and lower pension expense) and the much higher chance now of a long lasting economic expansion that rivals the 10 year US record. We’re more confident now that the S&P will reach 2500 in 2018 before suffering its next bear market.

Goldman Sachs Top Ten Market Themes for 2017

Chief Credit Strategist Charles Himmelberg says 2017 will be “High growth, higher risk, slightly higher returns”

  1. Slightly higher returns relative to 2016. “Best improvement in the opportunity in global equities is in Asia ex-Japan.”
  2. Fiscal stimulus in the U.S. will help reflate the economy
  3. No imminent trade war on the horizon, any re-negotiation of agreements currently in place (like NAFTA) to focus on attempts to improve the prospects for the U.S. manufacturing
  4. The Emerging Markets risk ‘Trump tantrum’ is temporary
  5. Forecasts ($/CNY at 7.30 in 12 months) a depreciation for yuan well beyond forward market pricing
  6. Monetary policy will increasingly focus on credit creation
  7. 2017 will confirm that the U.S. corporate sector has emerged from its recent ‘revenue recession’
  8. Forecasting large boosts to public spending in Japan, China, the U.S., and Europe, which should fuel inflationary pressures in those economies
  9. Commodity-sensitive segments of the credit market have suffered pain in 2016, there hasn’t been much in the way of contagion… expect more of the same in 2017, with the credit cycle not making a turn for the worse
  10. Conditional on a large fiscal stimulus in 2017, the FOMC will be obliged to respond more aggressively to an easing of financial conditions, all else equal … cautions that it’s no sure bet that financial conditions will ease in the year ahead, noting the recent rise in bond yields and the U.S. dollar