Aussie Fund Giant Bets on U.S. Company Bonds as Tax Talk Lingers

(Bloomberg) -- U.S. lawmakers will succeed in inking a $1.4 trillion deal to slash corporate taxes by early next year. American companies with solid balance sheets will be the biggest winners and pose some of the best credit investments in 2018.

That’s the conviction of QIC Ltd., one of Australia’s biggest money managers overseeing A$82 billion ($62 billion) in assets. It also comes at a time when Senate Republicans can afford to lose no more than two votes among their ranks to pass the tax measures without Democratic help this week.

“It’s a real Goldilocks period in the U.S. -- risk assets are doing well,” Susan Buckley, managing director of global liquid strategies at QIC, said of the U.S. economic landscape. “There’s a high probability that the tax legislation will get through before the end of the year, if not early next year. It is going to be good for corporates and provide opportunities to pay down debt.”

QIC’s view comes as President Donald Trump seeks to deliver an overhaul of the U.S. tax system by the end of December, including a bill to cut the corporate tax rate to 20 percent from 35 percent in 2019. Risk assets such as equities and corporate bonds have surged this year in anticipation that the reforms will pass, with the S&P 500 reaching a record high while investment-grade U.S. corporate bonds have gained almost 6 percent.

Aussie Fund Giant Bets on U.S. Company Bonds as Tax Talk Lingers

Not everything is set in stone for the reforms to go through. While the House passed its own tax-cut measures last month, the reforms need to get the green light from the Senate, whose budget committee agreed to send the bill to the floor for a vote as early as Thursday.

Buckley said QIC’s debt funds have managed to beat their respective benchmarks during the year after favoring investment grade U.S. corporate bonds, even though “there have been episodes where you’ve had some heightened concerns about the market.”

Should the tax cuts fail to get through, there will be a correction in the equity and bond markets, she said. The Queensland-based manager will consider using credit options and other derivative instruments to hedge their bond bets “if the time lines are not being met” for the tax reforms.

Here are QIC’s views on other investment opportunities:

  • Favors bonds sold by Australian and offshore infrastructure and utilities companies that pay steady income streams
  • Wary of bonds sold by Australian property companies that have exposure to a heated housing market and highly-indebted households
  • Also cautious on retail sector which is facing stiffening competition from online retailers such as Inc.
  • “The headwind in Australia for some years will be just the household debt situation”

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