U.S. tax reform plan released—Now what?

In this week’s edition of Market Week in Review, Rob Cittadini, regional director, consultant relations, chatted with Senior Investment Strategist Paul Eitelman about the tax reform plan unveiled earlier this week in the U.S.

U.S. tax reform takes center stage—What might investors expect?

From a policy perspective, this was an important week in the U.S., Eitelman stated, as the Republican party’s blueprint for tax reform was revealed. The plan, which calls for reducing the corporate tax rate from its current level of 35% to 20%, is “pretty aggressive,” Eitelman said, noting that such a drop could have large-scale implications on the size of the federal budget deficit. In his view, this is likely to complicate the negotiating process in Congress going forward, especially with some of the more fiscally conservative members of the Republican party.

“Investors should think about the plan as the opening bid—or perhaps the best opening offer—but tax reform is likely going to be a long, drawn-out process,” he said. Ultimately, Eitelman and the team of Russell Investments strategists believe that a compromise will be brokered, likely leading to smaller tax cuts, potentially in early 2018.

Emerging markets slump as U.S. dollar rises

Shifting to equities, Eitelman noted that emerging markets struggled during the week, at one point underperforming the U.S. market by roughly three percentage points, according to the MSCI Emerging Markets Index, relative to the S&P 500® Index. Why? “The reason is mostly due to movements in currency markets,” Eitelman explained, pointing out that emerging markets had, until recently, benefitted from a weakened U.S. dollar in 2017. This week, however, the dollar rose to its highest level in over a month, per the U.S. Dollar Index.

“The dollar has turned into a headwind for emerging markets,” Eitelman said, adding that in his view, this constitutes a watchpoint for investors going forward. However, he believes that emerging markets still offer plenty of good opportunities over the next 12 months—including relatively attractive valuations and improving cyclical fundamentals.

Merkel wins, shifts focus to forming governing coalition

Transitioning to the recent German election, Eitelman noted that although Angela Merkel was re-elected to a fourth term as chancellor, her party’s margin of victory was smaller than many polls had suggested. This means she’ll have to form a somewhat challenging coalition, Eitelman said—and that has led some investors to worry about political uncertainty in Europe. However, Eitelman and his team of strategists are confident that Merkel will be successful in patching together a governing coalition—especially due to the recent departure of finance minister Wolfgang Schaeuble.

“This creates a high-level opening in the German government, allowing Merkel to attract a coalition partner,” Eitelman explained, calling it “a nice little carrot that will hopefully lead to a successful coalition.” He added that, in his view, Germany likely won’t need to have a special second election. The take-home message here, Eitelman concluded, is that political uncertainty should remain constrained in both Germany and Europe as a whole.

Watch the video.