Donald Trump’s presidential win is expected to bring sweeping changes to regulation, trade and even accounting rules at home and abroad. CFO Journal talks leaders in the corporate finance sector to gauge reaction the day after the election and talk about the possibilities under a Trump administration.
Republican Congress could strong-arm SEC, says former director. The desire for fast-paced change could prompt Congress to pass a law that either enacts or scraps a series of SEC rules in one fell swoop, said Meredith Cross, partner at WilmerHale and former director of the SEC’s corporation finance division. “Usually, Congress doesn’t directly do the regulation,” she said, adding that the 2012 Jumpstart Our Business Startups Act was an exception. In that law, Congress wrote and enacted new listing rules for emerging companies without SEC input.
Repealing Dodd-Frank won’t be so simple. The 2010 financial reforms are more complex than many people realize and removing or amending them could have unintended consequences, Ms. Cross added. “A lot of people think of it as just regulating banks, but it does a lot more than that,” she said. The regulations covered everything from removing references to credit rating companies from SEC rules to disclosing the use of conflict minerals to rules governing financial derivatives trading. “It would be interesting to see if they do that rule by rule or if congress does it on a more sweeping basis,” Ms. Cross said. Amending the Act rule by rule would give the SEC a more surgical approach, but it is also more time consuming, she said.
Higher rates under Mr. Trump could help treasurers. Jerry Klein, head of the corporate cash management group at Hightower Treasury Partners, an investment-management firm, said interest rates could move higher if Mr.Trump imposes trade barriers and boosts fiscal spending during his presidency. A move up in rates could help treasurers at companies earn more on their cash balances, he added. He said companies could keep most of their money in short-term funds, but could also have more incentive to invest some for longer periods and earn more on the cash.
Trump’s SEC could scale back enforcement, lawyers say. The SEC, under Chairman Mary Jo White, aggressively pursued enforcement actions against even small transgressions as part of the former NY Attorney General’s “broken windows policing” approach to regulating corporate finance. A Trump SEC Chair, when one is appointed, could take a less exacting approach, said John Eickemyer, an attorney at Vedder Price and co-chairman of the firm’s accounting-law practice group. “They might have a more traditional Republican approach, which is to reduce the emphasis on regulation,” Mr. Eickemeyer said. “Over time the enforcement efforts may become less aggressive than they have been,” he said.
Repatriated cash could pay for infrastructure spending. To avoid repeating the missteps of the 2004 repatriation exemption, the Trump administration could reduce the tax on repatriating foreign cash while funneling some of those revenues to an infrastructure bank, said Stephen Ryan, partner and leader of the government strategies practice at law firm McDermott Will & Emery. “Some of the money will go into an infrastructure bank that will make investments in America, while the tax rate would go down substantially to in order to induce repatriation,” Mr. Ryan said. “That way you don’t have to trust the business interests of the individual companies.” The idea is part of Sen. Charles Schumer’s (D., NY) tax plan and could help Trump push the measure through the senate, he added.
Trump administration could clear the road for driverless cars, lawyers say. NHTSA’s proposed guidelines would ask companies to submit certain information to the agency for its staff to assess the safety of each technology, but this is time consuming, burdensome and requires expertise the agency may not have, says Katie Thomson, partner at Morrison Foerster LLP. Under a Republican administration, “there may be more willingness to accept consensus-based standards, that are maybe less restrictive than you might expect out of a safety organization,” she says.
Auto makers could see easier emission standards. Detroit auto makers could get a helping hand from the Trump White House and Republican Congress, in the form of looser fuel economy and greenhouse emission standards, says Ms. Thomson. The EPA and NHTSA is currently reviewing the 2022-2025 standards, which have been criticized by auto makers for being too costly to implement. “There’s a strong likelihood that the industry could influence the standard to be lowered from what they were originally proposed,” Thomson said.
Railroads could delay compliance with expensive safety measures, lawyers say. The implementation of positive train control, an accident prevention system, could be delayed under a Republican administration, says Katie Thomson, partner at Morrison Foerster. “Railroads have been opposed to implementing positive train control, or have wanted to extend the compliance date much further into the future, and I think they will have the political traction they need to get more of the relief they’ve been seeking,” she said.
Trump’s tough immigration stance could hurt tech industry. President elect Donald Trump’s anti-immigration rhetoric could translate into cuts to foreign skilled-worker visa program, known as H1B, said Mr. Eickemyer. These visas are particularly important to Silicon Valley, as tech companies rely on foreign engineers to plug a domestic skills shortage. “The tech industry will have some real concerns about the H1B visa program and the degree to which that might be restricted,” Mr. Eickemeyer said. “That will be one of the fault lines within the Republican congressional caucus, because there are some portions that are more supportive of the tech industry,” he added. “Overall, we’re in uncharted territory, but i think the thrust of the administration will be one that is much more pro business, much less emphasis on regulation,” Mr. Eickemeyer said. “But i think there are some industries, for example the tech industry, that is going to find that its interests are not going to be given as much deference by the new administration.”
Lower corporate taxes are likely to boost balance sheets of some companies, CFOs say. Since U.S. corporations often use different methods for financial and tax accounting, many companies carry deferred tax liabilities on their books to record a temporary misalignment between expected and actual tax payments. “The reduction of marginal rates going forward will help your balance sheet because it will lower your future liability,” said Mark Smetana, chief financial officer at EBY-Brown Co. and a member of the Financial Executives International’s Committee on Private Companies Policy.
Trump’s planned tax overhaul gives private companies a chance to get equal treatment. Under current rules, common small business structures like partnerships and pass-through corporations can be taxed at the highest individual marginal rate, which is substantially higher than the rate levied on large public corporations. That disparity is likely to be eliminated under both Mr. Trump’s tax plan, said Mark Smetana, chief financial officer at EBY-Brown Co. and a member of the Financial Executives International’s Committee on Private Companies Policy.“There should be parity in treatment of business-sourced income between large incorporated companies and partnership-like privately held ones,” Mr. Smetana said. “That, frankly, is a substantial policy change from the current administration, that have focused primarily on corporate-formed business reform,” he added.
A simpler tax code could see U.S. companies lose their deductions. If Mr. Trump advances his plan to streamline the tax code with a lower corporate rate, many companies could lose the deductions they use to reduce their tax bill, said Mark Smetana, chief financial officer at EBY-Brown Co. and a member of the Financial Executives International’s Committee on Private Companies Policy. This is a worry for companies that use last-in-first-out inventory accounting, or LIFO, such as oil and gas producers, manufacturers and many wholesale distribution businesses, Mr. Smetana said. The accounting practice allows companies to record the value of their inventory at the earliest cost paid for it, deferring the impact of inflation until the items are sold in a reserve. “What happens with LIFO reserves? Do all of us on LIFO have to pay back some of that reserve over a future period of time, or would we not be able to deduct that?” he said.
Treasurers say no to divergence, want to keep options open. “The message we do receive from some of our members is that they would prefer not see regulatory divergence: the combined effects of Dodd-Frank and its EU counterparts are burdensome but are similar and are now managed,” said Stephen Baseby, associate policy & technical director at the Association of Corporate Treasurers in London. “The problem would be that the U.S. election, Brexit, and further EU regulatory evolution lead to divergence so that businesses find themselves managing several regimes simultaneously but such changes are not quick.”
Issuing debt and borrowing through private placements in the U.S. remain options for European companies, Mr. Baseby said, as treasurers aim to keep a range of funding options. There is an element of “business as usual,” he said. With Brexit, corporates hedged out their forex exposure over the vote and several months into the future. The U.S. dollar-exchange rate could move in some companies’ favor but hedging out that opportunity could give an advantage to competitors. “Decisions about hedging will depend on the materiality of U.S.-dollar exposure for any particular business”, Mr. Baseby said.
Companies might wait a while before issuing new bonds, bankers say. “We expect that the (…) election will not be impacting issuers’ decision on whether to access the U.S. dollar bond market, but rather on what time to access the market,” said Isabelle Toledano-Koutsouris, EMEA co-head of corporate debt capital markets at UBS AG in London. “The U.S. dollar bond market will remain a market of choice for issuers willing to fund but they may wait and access the market once the potential volatility post-election (…) has superseded,” she said.
Trump’s election makes a Fed rate rise less likely, analysts say. “I think there’s a genuine risk that the results will cause global economic and trade turmoil discouraging the Federal Reserve from raising interest rates in December”, said Mark O’Toole, vice president of commodities and treasury solutions at OpenLink Financial LLC, a currency risk-firm in New York. This, according to him, could be beneficial for companies, at least in the short run.
Analysts expect market and currency volatility to weigh down firms. “The election of Donald Trump… will cause prolonged market uncertainty which will be bad for corporates,” said Richard Falkenhaell, FX strategist at Skandinaviska Enskilda Banken AB, Sweden’s second largest bank. Many businesses, he said, relied on a stable exchange rate and could be hit hard by continued volatility in financial markets. “Because of the high cost, only some firms have hedged against this.”
Chinese executives expect substantial changes in U.S.-China trade. “The election of Donald Trump could lead to the U.S. dollar remaining weak, which would suppress the export of Chinese goods to the U.S.,” said Ricky Ye, chief executive of DF Robot, a Chinese robotics and technology firm based in Shanghai. Potential tariffs on imports on China could be a “nightmare”, according to Mr. Ye. “We don’t know yet what Trump’s China policy will look like but it could have strong implications for trade relations between the U.S. and China”, Mr. Ye said.
Nevertheless, some Chinese executives embrace a Donald Trump win. “Some welcome the result as they believe Trump demonstrates entrepreneurship, pragmatism and a business profit-driven mentality,” said Edward Tse, CEO of Gao Feng Advisory Company, a business consultancy based in Shanghai. “Many Chinese businessmen aspire his success and believe Trump’s victory is favorable to global trade.” Others however fear that Mr. Trump might hurt Chinese-U.S. trade relations. “[Some believe] Trump’s anti-free trade and anti-globalization talk will slow down and potentially reverse global trade, thus hurting China, the greatest beneficiary of globalization,” Mr. Tse said.
Should Mr. Trump decide to introduce tariffs against Chinese imports, this could lead to a “trade war,” said Michael Levy, investment director at Baring Asset Management Limited in London. “The global supply chain, which is highly interconnected in the IT and automotive industries, would … suffer greatly,” Mr. Levy said. About 18% of Chinese exports go to the U.S.
Mexican firms will also take a hit. “Most exposed are the economies that export most to the U.S.,” said Valentijn van Nieuwenhuijzen, chief strategist at NN Investment Partners, a Dutch asset manager. “The clear standout here is Mexico, which sends 82% of its exports to its northern neighbor,” Mr. van Nieuwenhuijzen said.
President-elect Trump could have a negative impact on the Mexican economy, said Michael Levy, investment director at Baring Asset Management Limited in London. “If we are moving toward tariffs, global trade will likely suffer and capital flows between countries may weaken—Mexico’s reliance on the U.S. could see it disproportionately affected,” Mr. Levy said. “Almost a third of Mexico’s GDP relies on its northern neighbor and Trump’s promise of a 35% tariff targeted at U.S. companies that outsource abroad could be costly, particularly for the automotive industry,” he said.
Besides China and Mexico, many European countries could be impacted. Should the U.S. become less open for trade, it “could have a negative impact on global trade which in turn could also impact Germany and other European trading nations,” said Mr. Falkenhaell, the FX strategist. “This will be negative for a lot of economies.”
The protectionist measures will not only be negative for foreign firms, but also for American ones, said Geir Lode, head of global equities at Hermes Investment Management Limited. “President Trump may win popular support by limiting immigration, but the damage this causes the U.S. economy will be monumental, with an estimated 11 million fall in the U.S. labor force and potential $1.6 trillion contraction in GDP,” Mr. Lode said.
–Vipal Monga contributed to this report.
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