What is repatriation of cash?

Craig Holke Investment Strategy Analyst WEEKLY GUIDANCE ON ECONOMIC AND GEOPOLITICAL EVENTS September 25, 2018 Repatriation How Are Firms Using Their Overseas Cash? Key takeaways» U.S. businesses are bringing back large sums of cash from overseas subsidiaries following passage of federal tax reform late in 2017.» This cash is being used in a variety of ways, including paying down debt, improving pension funding, buying back shares, paying dividends, and reinvesting in the business. What it may mean for investors» We believe many uses of this cash are indirectly positive for equities and bonds through corporate balance-sheet improvement. The cash can be more directly beneficial for equities by boosting share prices through share buybacks. What is repatriation of cash? Large U.S. companies have significant revenues from many countries around the world. Prior to the Tax Cuts and Jobs Act of 2017, if companies wanted to bring that money back to the U.S., it was taxed at the U.S. corporate income tax rate of 35%. Companies generally wished to avoid this large tax burden and left the money parked overseas. The new tax cuts reduced the overall federal corporate tax rate to 21%. But Congress also is allowing companies to bring back cash held overseas at a lower tax rate of 15.5%. Going forward, U.S. companies revenue generated overseas will not be subject to U.S. taxes. 1 The goal was to encourage U.S. companies to bring the cash back and motivate corporate leaders to spend large sums updating and expanding the equipment which their business uses to operate. The 100% expensing of business investment over the next five years was a tax-reform incentive that also supported this objective. This was expected to provide a strong stimulus that would flow through the U.S. economy, creating jobs and pushing economic growth higher. 1 The U.S. will implement a territorial tax system, similar to those of most other developed countries. In this system, most future foreign profits will not be taxed as U.S. revenues, making firms more competitive in the global economy. 2018 Wells Fargo Investment Institute. All rights reserved. Page 1 of 5

How has it turned out? The initial estimates of cash to be brought back from overseas ranged from several hundred billion U.S. dollars to more than to $2 trillion. However, not all cash held overseas was expected to be brought back, as businesses still need cash to run their current operations abroad and for future expansion. Chart 1 depicts the amount of cash brought back into the U.S. since 1999. The 2005 spike was from the repatriation holiday as part of the Homeland Investment Act of 2004. The corporate cash tax rate at that time was 5.25%, and companies brought back significant sums and promptly used them mostly for share buybacks and paying dividends. Cash being brought back this year is significantly higher, including $295 billion in the first quarter and an additional $170 billion in the second quarter. Companies in the Information Technology and Health Care sectors have brought the most cash back to the U.S. Although there was a sizable drop-off between the first and second quarters of 2018, expectations are for an additional several hundred billion to be brought back before year-end. Chart 1. U.S. companies are bringing home a significant amount of cash $350 $300 Ta x Cuts a nd Jobs Act of 2017 $250 $ billions $200 $150 Homeland Investment Act of 2004 $100 $50 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sources: Bureau of Economic Analysis, Wells Fargo Investment Institute, September 6, 2018. Series reflects cash brought back to the U.S. from overseas. Data is quarterly from the first quarter of 1999 through the second quarter of 2018. What is the cash being used for? As noted, the cash brought back is being used in a variety of ways. Companies are paying down debt, improving pension funding, buying back shares, paying dividends, and investing in their operations. Net bond issuance year to date, especially for shortermaturity issues, has declined. This is thought to be attributable to the return of overseas cash. Extra cash also has been used to make large prior-year pension contributions before the mid-september deadline when the corporate tax rate would change. U.S. companies have announced more than $400 billion in share buybacks, supported at least in part by repatriated cash. This is almost twice the previous record, 2018 Wells Fargo Investment Institute. All rights reserved. Page 2 of 5

which was set in the first quarter of this year. First-quarter aggregate S&P 500 Index dividends increased by 8.2% compared to the same period last year. While business investment may not meet Congress expectations, it is forecast to increase roughly 6% in 2018. This would be the highest year-over-year business spending since 2014, and it is considered strong for this point in the business cycle. Market implications Cash being brought back is another form of fiscal stimulus from the tax cuts. While much of this cash may not be used for Congress original intent (companies investing in their own business), we believe that improving balance sheets through debt reduction and increased pension funding is a solid use of repatriated funds. Yet, business investment is increasing, driving further demand and growth within the U.S. economy. The downside of the tax benefits for businesses is that the federal government will not receive the tax revenue it otherwise would have received. This is likely to result in increased federal deficits and higher debt levels in the near term. Many of these uses of cash is expected to be viewed positively by market participants. Increased cash, less debt, and better pension funding are all typically positive for equities, even before the direct price effects of share buybacks and higher dividends. These same factors often boost overall fixed-income credit quality, and they can potentially push borrowers yields lower than they otherwise would have been. Markets will ultimately decide whether the near-term benefits of repatriated cash outweigh the effects of higher longer-term U.S. fiscal deficits. 2018 Wells Fargo Investment Institute. All rights reserved. Page 3 of 5

Economic Calendar Date Country Report Estimate Previous 9/25/2018 US FHFA House Price Index MoM -- 0.20% 9/25/2018 US S&P CoreLogic CS 20-City YoY NSA -- 6.31% 9/25/2018 US Conf. Board Consumer Confidence -- 133.4 9/25/2018 US Richmond Fed Manufact. Index -- 24 9/25/2018 US Conf. Board Expectations -- 107.6 9/25/2018 FRANCE Manufacturing Confidence -- 110 9/25/2018 MEXICO Economic Activity IGAE YoY -- 1.15% 9/26/2018 US MBA Mortgage Applications -- -- 9/26/2018 US New Home Sales -- 627k 9/26/2018 US FOMC Rate Decision (Upper Bound) 2.25% 2.00% 9/26/2018 FRANCE Consumer Confidence -- 97 9/26/2018 BRAZIL Total Outstanding Loans -- 3125b 9/26/2018 CHINA Industrial Profits YoY -- 16.20% 9/27/2018 US Initial Jobless Claims -- -- 9/27/2018 US GDP Annualized QoQ -- 4.20% 9/27/2018 US Durable Goods Orders -- -1.70% 9/27/2018 US Durables Ex Transportation -- 0.10% 9/27/2018 US Continuing Claims -- -- 9/27/2018 US Personal Consumption -- 3.80% 9/27/2018 US Core PCE QoQ -- 2.00% 9/27/2018 US Cap Goods Orders Nondef Ex Air -- 1.60% 9/27/2018 US Advance Goods Trade Balance -- -$72.2b 9/27/2018 US Retail Inventories MoM -- 0.40% 9/27/2018 US Pending Home Sales NSA YoY -- -0.50% 9/27/2018 US Kansas City Fed Manf. Activity -- 14 9/27/2018 GERMANY CPI YoY -- -- 9/27/2018 JAPAN Industrial Production MoM -- -- 9/28/2018 US Personal Income -- 0.40% 9/28/2018 US Personal Spending -- 63.6 9/28/2018 US PCE Core MoM -- 2.00% 9/28/2018 US PCE Core YoY -- 2.30% 9/28/2018 US PCE Deflator YoY -- 0.20% 9/28/2018 US Real Personal Spending -- 0.10% 9/28/2018 US PCE Deflator MoM -- 0.10% 9/28/2018 US Chicago Purchasing Manager -- 0.20% 9/28/2018 US U. of Mich. Sentiment -- 0.30% 9/28/2018 UNITED KINGDOM GDP QoQ -- 0.40% 9/30/2018 JAPAN Nikkei Japan PMI Mfg -- -- 10/1/2018 EUROZONE Markit Eurozone Manufacturing PMI -- -- 10/1/2018 US Wards Total Vehicle Sales -- 16.60m 10/1/2018 US Markit US Manufacturing PMI -- -- 10/1/2018 US ISM Manufacturing -- 61.3 10/1/2018 US Construction Spending MoM -- 0.10% 10/1/2018 US ISM Prices Paid -- 72.1 10/2/2018 AUSTRALIA RBA Cash Rate Target 1.50% 1.50% 10/2/2018 EUROZONE PPI YoY -- 4.00% 10/2/2018 JAPAN Nikkei Japan PMI Services -- 51.5 Source: Bloomberg, as of September 24, 2018. 2018 Wells Fargo Investment Institute. All rights reserved. Page 4 of 5

Risk Considerations Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR 0918-03792 2018 Wells Fargo Investment Institute. All rights reserved. Page 5 of 5