Head of BofA Global Research
A rising tide lifts all boats (and cars). This week we discuss rising American taxes, rising European inflation and rising electric vehicle (EV) adoption.
President Biden’s tax proposal would raise the top income tax bracket to 39.6% from 37% and take corporate taxes to 28% from 21%. Jared Woodard, head of the Research Investment Committee, points out this would be the largest increase in 53 years. The current proposals are largely viewed by Congress as somewhat aspirational and a corporate tax rate of 25% seems more likely. The elimination of favorable treatment for capital gains and qualified dividends also lacks significant support. Higher corporate taxes of 25% would mean less profits and S&P 500 earnings would be reduced by 5%. Although plans for new spending are bullish for markets, they may take years to be realized while tax changes take effect immediately.
Woodard suggests a dimmed view on corporate profits could spark a major market correction, with tech and healthcare faring the worst. Tax-efficient assets include Exchange Traded Funds instead of mutual funds, municipal bonds/preferred bonds instead of corporate bonds, Master Limited Partnerships instead of energy stocks, and tax-advantaged closed-end funds.
The strong recovery is leading to inflationary pressures all around the globe. This week we focus on Europe where a spike in raw material prices such as steel and copper creates a challenge for mass-market auto OEMs (original equipment manufacturers).
Price increases in packaging and oil-based materials are set to lead to margin pressures for personal hygiene, home care and brewing companies, while rising wages could weigh on labor-intensive transportation. As for which companies have the pricing power to deal with these cost pressures, capital goods, logistics businesses, luxury goods and software & IT companies should all be relatively protected from rising raw material and labor costs.
Also, supply bottlenecks, driven by port disruptions and container shortages, have had significant positive earnings effects for freight forwarders and shipping liners.
U.S. Auto analyst John Murphy and the Global Auto Research team present their annual Who Makes the Car report, which breaks down the automotive supplier industry. As investment burdens increase, outsourcing from OEMs to suppliers may also increase in an effort to leverage economies of scale.
John refers to some of these large suppliers as “Tier 0.5” which are companies that can supply and manufacture large portions of a vehicle. Over the past decade, Asian automotive suppliers have gained share at the expense of North American and European suppliers. While the gap between content costs for a U.S. battery electric vehicle (EV) and a traditional internal combustion engine has narrowed, it remains significantly higher at about $15,000.
Initial estimates for autonomous vehicle costs are $150,000-$200,000. But if you’re still willing to do the driving yourself, you will find that high residual values make the cost of owning a new car the lowest it has been in 18 years.
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