President Donald Trump's proposal to slash US corporate taxes should substantially benefit a number of locally listed companies with American operations, Citi strategists say.
Tax reform legislation is due to be revealed on Thursday morning by the House of Representatives' Ways and Means committee. The contents of the legislation has been a tightly-held secret, but President Trump has signalled his goal of reducing the corporate tax rate to 20 per cent, from 35 per cent currently, in order to boost economic growth.
While the cuts "appear substantial... the details are still sketchy, and agreeing on funding and an overall package seems likely to be difficult," Citi equity strategist Tony Brennan said.
Nonetheless, Mr Brennan highlighted a number of Australian companies which have "meaningful US operations and their group earnings could benefit - we estimate perhaps in the order of up to 10 per cent," Mr Brennan said.
Firms listed in Australia but earning more than half of their profit in the US include building products firm James Hardie, shopping mall owner Westfield, and gaming machine supplier Aristocrat Leisure, according to Citi.
And it's not just the prospect of lower taxes. Australian companies exposed to the US are in a sweet spot given the current political and economic forces playing out in global markets, with the prospect of a lower Aussie dollar also working on US-exposed businesses.
"We think the RBA will further lag the Federal Reserve trajectory and we have no hikes forecast for next year. Add in some tax-induced US dollar strength and a bottom-right move for the Australian dollar seems realistic," Morgan Stanley Australian equity strategist Chris Nicol said.
The Australian dollar has been punished of late, losing roughly 2.5 per cent over the past two weeks, and is now hovering at around US76.76 cents, and is down from a high of more than US80 cents at the end of September.
Weak inflation data and political turmoil in Canberra has weighed on the local currency in the past week.
"The recent weak CPI should remind us that with flat/declining commodity prices expected over the next six months or so, rate differentials and rate expectations should take over in terms of foreign exchange valuation and direction," Mr Nicol said.
At present, Australian interest rates are at 1.5 per cent but the US rate at 1.25 per cent is set to catch up possibly as soon as December, when the Federal Reserve is widely expected to hike by a further quarter of a percentage point.
The Bank of Canada has pressed pause after a series of hikes, while the Bank of England on Thursday night is expected to lift rates for the first time in a decade, to 0.5 per cent.
Morgan Stanley is expecting the Australian dollar to fall to US67 cents by the fourth quarter of next year.
"Under this scenario, there are many ways to gain exposure," Mr Nichol said.
He highlighted four groupings of ASX stocks: "global growers" such as CSL, Cochlear, Macquarie and Amcor; "translators" such as Treasury Wine, QBE and Resmed which will enjoy higher reported Aussie dollar earnings thanks to currency translations;
"US-centric" firms such as James Hardie; and "domestic beneficiaries", including Star Entertainment and education and tourism-linked-firms which could enjoy higher spending power by international visitors.
On the overall direction for the ASX going forward, however, there's division in the equity strategist ranks.
The ASX has rallied sharply over the last couple of weeks as investors gained more confidence in a recovering global economy.
"These gains have been made without a fuel stop – earnings growth is still languishing at sub 5 per cent on a 12-month forward basis," Mr Nicol said. "The tyres are overheating, with price to earnings multiples again at all-time high."
However, Citi's Mr Brennan said "in this environment, there would seem scope for the market to continue to move higher in the shorter term, with spot commodity prices suggesting more earnings upside, and possible further support if the US dollar strengthens relative to the Australian dollar and US tax cuts occur."
"Our forecast remains for the ASX 200 to rise above 6000 and reach 6250 by mid next year, though thereafter we would envisage more limited gains," he said, with medium-term earnings growth looking moderate, valuations "not low" and the possibility interest rates could rise.