While sweeping changes to the
tax system were widely expected to encourage multinational companies to
bring cash back to the US, the first fiscal quarter under the policy
didn't see as much repatriation as some envisioned.
But the tax law's effects are just getting started, according to
analysts at Bank of America Merrill Lynch. They predict repatriation
will pick up in the next three months and, in theory, boost the US
dollar.
"One of the most contrarian calls we have made this year is that US
profit repatriation flows following the recent tax reform will be
bullish for the USD," the analysts wrote in a note to clients Thursday.
US companies have about $3.5 trillion accumulated profits abroad
today, the analysts noted, and they expect up to 90% of companies they
surveyed to repatriate "at least part of" that money.
The analysts believe the GOP's new tax policies, which took effect in
the beginning of the first quarter, could still help by removing a
"large penalty" for repatriation.
Under the tax legislation,
multinationals have to make a one-off payment on profits socked away
overseas — 15.5% on cash holdings and 8% on illiquid investments. And
after that, they can bring foreign profits home tax-free. The former tax
policy levied a top rate of 35% on repatriation.
Apple
announced in January that it would bring about $252 billion of its
offshore cash back to the US, but other multinationals have been slow to
follow. And the dollar, which in theory should get a boost from
repatriation, has shown it. The greenback posted its fifth-straight quarterly loss in the first three months of 2018.
"We were optimistic early this year that markets would start pricing
repatriation flows and this would support the USD in Q1," the analysts
wrote. "Clearly, this has not happened and the consensus remains
strongly against our views."
Still, analysts at BAML remain confident the second quarter will be different as corporations are more prepared to repatriate.
"Feedback from recent meetings with our corporate clients is that in
general they spent the first quarter getting the details on their total
accumulated profits abroad and the currency and asset composition," the
analysts added.
And that means there could still be room for a strong dollar in 2018.
“Given the strong USD rally
following the 2005 Homeland Investment Act, we may see something similar
as markets start appreciating the potential size of repatriation flows,
both in the short term from the stock and the long term from the flow.”
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