Markets Insights

Upbeat news for stock market bulls

OCBC Investment Research said that while oil-linked stocks like Keppel Corporation and Sembcorp Marine have recovered, the sector will experience a sustained recovery only with more contract wins.
OCBC Investment Research said that while oil-linked stocks like Keppel Corporation and Sembcorp Marine have recovered, the sector will experience a sustained recovery only with more contract wins.PHOTO: REUTERS

US tax reform moving closer to fruition; and deal on production cuts cheers up oil markets

The latest newsflow over the weekend continues to be positive for stock market bulls.

In the United States, tax reform is moving closer to reality, even while interest rates are poised to go up again amid a strong economy.

Separately, oil markets are upbeat after oil cartel Opec and other oil-producing countries, including Russia, agreed to keep production cuts throughout 2018.

On Saturday afternoon in Asia, the US Senate agreed on a sweeping tax reform Bill, two weeks after the House of Representatives did so.

The clearest benefits of the tax Bill will flow to businesses. Corporate taxes will go down from 35 per cent to 20 per cent, among other things.

As for individuals, the overall impact is mixed.

While individual tax rates will be reduced and the number of tax brackets simplified, deductions on state and local income taxes will also be eliminated, with the exception of a deduction of up to US$10,000 (S$13,452) a year for state and local property taxes.

There are two possible financial effects of the US tax reform. First, tax cuts are generally perceived to be a boost for the economy, even while there is anxiety that the benefits will accrue to the richest... Second, with fiscal stimulus, it is possible that the US dollar could rise after depreciating substantially this year.

Meanwhile, political squabbling over raising the government debt ceiling might be delayed until later in the month, to give House and Senate politicians time to reconcile the two different versions of the tax reform Bill they have.

There are two possible financial effects of the US tax reform.

First, tax cuts are generally perceived to be a boost for the economy, even while there is anxiety that the benefits will accrue to the richest. So US stocks, which continue hitting new highs, might continue their ascent.

Some economists, however, are sceptical that tax reform will boost the economy as much as the Republicans claim. The debate will also revolve around how much spare capacity there is left in the US economy.

The stimulus in demand from tax cuts might be offset by US rates rising faster, said Mr Jeremy Lawson, chief economist at Standard Life Investments.

Second, with fiscal stimulus, it is possible that the US dollar could rise after depreciating substantially this year. After all, the Fed is poised to raise interest rates after a meeting next week, to a range of 1.25 to 1.5 per cent, from the current range of 1 to 1.25 per cent.

But Mr Philip Wee, foreign exchange strategist at DBS Group Research, thinks fears are overdone.

As for oil, while blue chip oil-linked stocks like Keppel Corporation and Sembcorp Marine have recovered, the sector will experience a sustained recovery only with more contract wins, said OCBC Investment Research last Friday.

It likes Keppel and the Sembcorp names, but remains "neutral" across the sector "given continued unease over the small-mid cap space".

A version of this article appeared in the print edition of The Straits Times on December 04, 2017, with the headline 'Upbeat news for stock market bulls'. Print Edition | Subscribe