|| Print ||
|Friday, June 27, 2014|
BY JASON NORRIS | OB BLOGGER
This past month, the World Bank lowered their 2014 global GDP growth assumptions. Citing the BRICs (Brazil, Russia, India and China) as well as the U.S. as culprits for the lowered estimates, growth was reduced to 2.8 percent for 2014, down from 3.2 percent. The IMF recently lowered its forecast for U.S. GDP growth to 2 percent from 2.8 percent for 2014, primarily because the negative numbers from the first quarter.
We believe the slowdown in the U.S. is solely a first quarter event due to weather, and we will see acceleration throughout the year (see our investment outlook). We are seeing confirmation of that with recent data from the ISM, industrial production and factory orders. Although slowing, China’s growth is still relatively robust and inflation remains under control. Regrettably, Brazil and Russia aren’t as fortunate. As the chart below highlights, Brazil and Russia are stuck in a slowing growth, high inflation environment that is difficult to overcome. With high inflation, there is pressure to raise interest rates, but that leads to an increased headwind for growth.
Unfortunately for Brazil, the build up for the World Cup did not provide the added stimulus that was hoped for. Corruption and cronyism have proved to be rampant and the economy has not seen the desired lift. There was hope that the employment opportunities would bring about an economic boost for their citizens. This hasn’t happened and there remains a strong sense of frustration among the public.
While soccer is still far down the list in popularity in U.S., we find ourselves getting caught up in the hype of the World Cup and are hoping the U.S. can make it to the second round.
The Mob Rules
While stocks hit new highs, geopolitical issues in the Middle East may be tempering those gains. With militants gaining control of key cities in Iraq, the supply of oil has now come into question. This has resulted in a run up in the price of crude. We are of the belief that the price of oil will remain stable as the U.S. continues to increase its supply over the long term and becomes less reliant on “foreign oil,” as indicated by the chart below.
We do believe, however, that energy markets will continue to experience short-term volatility due to global tensions. We have been overweight the energy sector based on our belief of an expanding global economy. This recent spike has resulted in the sector being one of the best performers over the last several weeks. If energy prices remain elevated into the summer driving season, U.S. consumer spending may face some headwinds.
2014 has seen a major pick up in merger and acquisitions with a major catalyst being taxes. Earlier this year, Pfizer attempted to purchase UK-based AstraZeneca and a rejected bid from Abbvie for Shire Pharmaceuticals PLC. Most recently, we saw the largest confirmed tax inversion deal with Medtronic agreeing to purchase Ireland based medical device manufacturer, Covidian. The value of the deal over $40 billion and will probably draw some political scrutiny as it gives Medtronic to move its “headquarters” from Minneapolis to Dublin. The income tax benefits aren’t major (reducing corporate rate from 19 percent to 17 percent), however, it would allow Medtronic to utilize all of its cashflow for share buybacks and/or dividends. U.S. companies with cash generated overseas cannot use it for buying back stock, dividends, U.S. hiring, as well as capital investments without repatriating it back to the U.S. and having to pay a higher tax rate. If the Medtronic/Covidian deal is approved, Medtronic will have access to all of its cash for those purposes as they will be officially and Irish company.
Our Takeaways for the Month
What is Tax Inversion?
Over the last several months we have seen a wave of cross-border acquisitions, primarily U.S.-based companies looking to purchase non-U.S.-based companies. There are a few reasons for this, but the main culprit is the U.S. corporate tax system. The United States has one of the highest corporate tax rates in the world. Therefore, multinational companies, based in the U.S. are looking to lower their tax rate by changing their country of domicile. We saw a wave of this several years ago as U.S.-based companies moved their headquarters offshore, (i.e., Covidian, Accenture, Ingersoll-Rank and Eaton) to Ireland. Now companies are looking to acquire non-U.S. companies and move their country of domicile offshore. However, it is not just the tax rate, it is also the tax structure. When U.S. companies earn profits outside the U.S., they will pay taxes on those profits where they were generated. However, if they want to move them back to the U.S. and reinvest the cash in people, plant, equipment or buyback stock or pay dividends, they have to pay the U.S. tax as well. Therefore, companies leave trillions of dollars outside the U.S. Multinational companies can set up headquarters outside the U.S. and utilize 100 percent of their cash at the lower tax rates. We believe we will see this trend continue until the U.S. modifies its tax code.
Jason Norris, CFA, is executive vice president of research at Ferguson Wellman Capital Management. Ferguson Wellman analysts blog on the financial markets for Oregon Business.
Monday, June 30, 2014
Oregon Business magazine won two silver awards for excellence in writing in the National American Society of Business Publication Editors Western region competition.
Thursday, May 29, 2014
BY LINDA BAKER
Remember mood rings? A team of scientists at Oregon State University has designed what might be considered a 21st-century analog of the ’70s jewelry fad: a bracelet that reveals one’s exposure to pollutants.
Monday, July 14, 2014
BY VIVIAN MCINERNY | OB BLOGGER
Some people think Amazon’s winking eye logo is starting to look like a hoodwink.
Thursday, May 29, 2014
I was in a rut. A few months ago, I was at my desk trying to come up with cover story ideas for our June “green” issue. But I was stuck on a concept that is a bit too tried and true in the magazine business.
Thursday, June 05, 2014
BY HANNAH WALLACE | OB BLOGGER
What does it take to launch and run one of these mobile food businesses?
Thursday, May 29, 2014
BY JENNIFER MARGULIS
Don Gentry navigates Klamath Basin water rights.
Thursday, July 24, 2014
BY CLIFF HOCKLEY | OB GUEST CONTRIBUTOR
With the increasing retirements of Baby Boomers, a massive real estate shift has created a significant increase in demand for NNN properties. The result? Increased demand has triggered higher prices and lower yields.
|The Private 150: Bigger But Leaner|
|The Perfect Food|
|Taxis Uber Alles?|
|Powerlist: Staffing Firms|
Vigilant enters a New Year with a new president.
How George Fox has become one of Oregon's largest private universities.
Forest Grove sees growth in the burgeoning food and beverage scene.
Lane Powell Shareholder Susan K. Eggum has been elected as vice chair of programs and projects for the International Association of Defense Counsel’s (IADC’s) Employment Law Committee.
Geffen Mesher is saddened to announce the passing of long-time shareholder, Tom “Mike” Anderson, who died on July 10, 2014, from liver disease diagnosed after recent heart surgery. He was 55 years old.
Fifteen Lane Powell attorneys have been named 2014 “Oregon Super Lawyers,” and another five attorneys have been named as “Oregon Rising Stars” by Super Lawyers magazine.