How the Tax Reform Bill Could Benefit Asset Managers
Tax cuts closer to reality
On Saturday, December 2, 2017, the Senate passed its tax reform bill, which, among other things, would lower the corporate tax rate from 35% to 20%. That could significantly benefit US corporations. BlackRock’s (BLK) effective tax rate for 3Q17 was 31.6%. Its EPS could potentially rise to $6.78 on a flat corporate tax rate of 20%, compared to its reported EPS of $5.78. The rate cuts could lead to a 12%–20% rise in corporations’ net incomes, which should help reduce leverage and result in quicker executions of expansion plans.
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Asset managers with ETFs and active offerings could see more assets since companies would be generating higher cash flows. That could help in the further expansion of assets under management for BlackRock’s peers, including State Street (STT), Goldman Sachs (GS), and JPMorgan Chase (JPM).
Interest rate hikes
The Fed is targeting an interest rate hike in December 2017 and three rate hikes in 2018 in order to reverse the easing deployed after the 2008 financial crisis. The broad markets (SPY) have risen, prompting policymakers to reduce liquidity through a tightening monetary policy. Higher rates should result in lower operating margins for leveraged companies. However, fixed income offerings could see higher allocations on a longer-term basis.
BlackRock (BLK), through its fixed-income offerings, is managing assets worth $1.8 trillion as of September 30, 2017, compared with $1.6 trillion the previous year. The company has assets totaling $3.2 trillion in equity offerings, a growth from $2.7 trillion from the previous year. Fixed income offerings could add another $200 billion by the end of 2018 amid rising rates and high valuations of equities across sectors.