FUND MANAGEMENT DIARY Meeting held on 14 November 2017

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1 FUND MANAGEMENT DIARY Meeting held on 14 November 2017 US tax cuts likely to be passed by early 2018 Republicans in the United States are edging closer to agreeing a package of tax reforms that would focus on reducing corporate and individual tax rates The eventual bill will provide a modest boost to growth in 2018, but the only lasting impact will be a large increase in the federal budget deficit The debt ceiling probably won t become a major issue again until February 2018, when tax refunds are paid. Failure to raise the ceiling would have serious consequences for the wider economy Republicans in the United States are close to agreeing a package of tax cuts worth $1.5 trillion over the next decade. While these are far from the sweeping tax reforms Republicans had promised, they would deliver a one-off boost to disposable income and spending next year. The federal budget process begins when the President submits a detailed budget request for the coming fiscal year, which begins on 1 October. The White House released a detailed proposal in May 2017, which incorporated severe cuts to nondefence discretionary spending and entitlement spending. Congress develops its own budget plan in the next stage of the process, called a budget resolution. This is a non-binding resolution that serves as a framework for budget decisions. It sets overall spending limits but does not decide funding for specific programs. Both chambers of Congress agreed to a budget resolution that would allow tax reform legislation to add up to $1.5 trillion to the federal deficit over the next ten years. The main use of the 2018 budget resolution has been to unlock the reconciliation process. This allows the Republican Party to pass tax reforms with just a simple majority in the Senate. Given that the Republicans have a majority in the Senate, the reforms can be passed without any support from the Democrats and with up to two Republican defections. Removing the need for bipartisan support should make the passage of tax reform much easier. The third stage in the budget process involves the House of Representatives and Senate each producing their own tax reform plans, amending them, and agreeing a final common version that the President can sign into law. Both chambers of Congress have now unveiled their plans. The House of Representatives plan was revealed on 2 November. On the individual tax side, the proposals include reducing the number of tax brackets, raising tax

2 thresholds and increasing child tax credit. Meanwhile on the business side, the bill includes an immediate and permanent cut to the headline corporate tax rate to twenty per cent, from the existing 35 per cent, and the pass-through rate on small business income would now be capped at 25 per cent. Along with a temporary move to allow firms to immediately write off some capital expenditures, these proposals could result in some changes to the timing of firms investment, temporarily increasing it. However, there is little evidence that corporate tax cuts result in a sustainable boost to growth. The bulk of the gains from these proposals would go to higher income households who tend to save a larger share of their income. As such, the multiplier on these tax reforms is likely to be quite small and they won t lift economic growth materially. Accordingly, the only lasting impact will be a substantial increase in the federal budget deficit. The Senate s plan, released on 9 November, has several differences from the House of Representatives proposal. These include delaying the cut in the headline rate of corporate tax until 2019 to save money, keeping seven tax brackets for individuals and not repealing the estate tax. The details of the final bill will probably change substantially from the proposals so far but the broad outline of the plan cuts to individual and corporate taxes worth $1.5 trillion will remain the same. This package of reforms will give growth a one-off boost in 2018, but will increase the budget deficit and drive up federal debt. In addition, it is unlikely to lift long-term growth because there will be few meaningful measures to boost labour force participation or encourage greater investment. However, if tax reform isn t passed by early next year, progress will be stalled by the upcoming mid-term elections in late If the Democrats make electoral gains in those elections, tax reform could be taken off the table entirely. Unless a full budget is passed by 9 December, Congress will need to pass a continuing resolution to ensure that agencies continue to receive funding until the full budget is in place. This is because the existing continuing resolution, which was approved by Congress in September following a deal between Donald Trump and congressional Democrats, expires on 8 December. That deal allowed for the temporary extension of government funding and suspended the debt ceiling. Without another continuing resolution or a full budget being passed, the Treasury will have to make use of accounting tricks or extraordinary measures to prevent a full federal shutdown from occurring on 9 December. These include prematurely redeeming Treasury bonds held in federal employee retirement savings accounts (and replacing them later plus interest), halting contributions to certain government pension funds or borrowing from money set aside to manage exchange rate fluctuations. Using these measures means that the debt ceiling probably won t

3 become a serious problem again until early February 2018, when tax refunds are paid. Planning from earlier debt crises in 2011 and 2013 suggest that the Treasury would be able to prioritise debt payments to avoid a default in early But that might still mean missing a social security payment or not paying military salaries. As such, the consequences for the wider economy of not raising the debt ceiling would be severe, even if it didn t prompt a debt default. If the debt ceiling is reached and the Treasury runs out of cash, then the United States would be forced to default on at least some of its obligations. This could cause significant damage to the economy and makes it highly likely that Congress will agree to a deal before that occurs. Strategy The Future Money team believe that a significant amount of uncertainty remains in relation to the tax cuts that have been proposed in the US. The checks and balances that the various tax reform plans still need to go through are likely to result in further amendments. It is likely that an agreement will be made between parties and that the debt ceiling is likely to be extended before a crunch point is reached. Neither party wants to be blamed for the lack of agreement, as it would likely have far reaching consequences on the economy and financial markets, therefore the risks are too great for an agreement not to be made. Where relevant, the Future Money Funds are underweight to the US relative to the long term (strategic) allocation. This reflects our view that the US remains overvalued, particularly given the uncertainty of the tax cuts and the potential impact that this will have on growth, and therefore we are finding better value opportunities in other regions.

4 Income Following the change last week in the European equity allocation there are no further areas of concern in Future Money Income. While Schroder Asian Income has lagged its wider peer group in recent months, this is at a time where income focused funds have lagged. We remain committed to this fund, which continues to deliver a strong yield along with significant capital growth. UK Equity Income 38% 8% 41% Other 5% Europe Cash / 4% Money 4% Real Value Thought is being put into a potential replacement for the Standard Life European Equity Income fund. Given the lower risk profile of Real Value, funds that offer strong defensive characteristics are being considered. No decision has yet been made. UK Equity Income 24% USA 6% 4% Europe 2% 49% Cash / Money 15%

5 Real Growth Stock markets have fallen back slightly this week. We believe this is part of normal market volatility and so have used this as an opportunity to top up the portfolio equity allocation to target levels. A small purchase of Threadneedle UK Growth & Income was made for this purpose. USA 9% 8% UK Equity Income 20% 36% UK 15% Europe 4% Cash / Money 8% Dynamic Growth The MI Somerset Emerging Dividend Growth fund will be repalced with the Invesco Perpertual Global Emerging fund. The Somerset holding has been a good performer for the portfolio over a number of years, but the decision has been taken to move to Invesco given the prospects for better returns in positive markets (the Somerset fund produced its best relative returns in toubled times for the sector) and due to the lower cost of the Invesco fund, which will feed through to lower costs for clients of Dynamic Growth. USA 10% 14% 21% UK 40% Cash / Money Europe Emerging 5% 3% 7%

6 Important Information Please note that the contents are based on the author s opinion and are not intended as investment advice. This information is aimed at professional advisers and should not be relied upon by any other persons. Any research is for information only, does not constitute financial advice or necessarily reflect the views of the author and is subject to change. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the fund is suitable and appropriate for their customer. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested. Important information about the funds can be found in the Supplementary Information Document and NURS-KII Document which are available on our website or on request. For any information about the Future Money funds please contact the authorised corporate director, Margetts Fund Management Ltd, on , admin@margetts.com or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR. A copy of their Terms of Business which relates to investments into the funds can also be obtained using these contact details. Issued by Future Money Ltd Future Money Limited is authorised and regulated by the Financial Conduct Authority Future Money Ltd The Euston Office One Euston Square 40 Melton Street London NW1 2FD