Notes on Capital Flows into the US

In trying to determine the factors that go into the flow of capital, and whether or not a particular country is a safe place to invest, there are a number of variables to consider. Marquis Advisory Group works with international companies looking to enter the US, thus it’s in our interest to be aware of these factors. One of our advisors, Dr. Patrick Caragata, founder of Rapid Ratings, and a former Chief Economist for New Zealand, recently wrote this note to his staff and shared this with us.

Factors that influence the flow of capital into the US

Current factors:

  • Rising US interest rates relative to rates abroad
  • Overseas political turmoil (terrorism, Middle East conflicts; etc) that creates a demand for a safe haven in the US for capital
  • Capital flight from economically unstable countries (Venezuela, Greece, Argentina etc)
  • Capital flight from the emerging markets as their asset bubble deflates (e.g. Brazil, Russia) driven among other things by rising US interest rates and falling commodity prices
  • Relative unit labor costs and relative productivity gains favoring US manufacturing
  • Rising preference for just-in-time local provision of inputs especially for more sophisticated (as opposed to large scale low cost manufacturing) technological products
  • Rising earnings for US corporates relative to rates of return abroad
  • Capital flight from China by people seeking to avoid taxes or corruption charges
  • Uncertainty surrounding the Euro, because of political and economic mismanagement
  • Rising US equity markets (we are a bit past the peak so this is now less important, but certainly not irrelevant because most investors prefer assets rather than CIB – cash in bank)
  • Expectations of a continuing rise in the US dollar

But who would have guessed (given the corporate inversions) (bloomberg article)  that the US is becoming a tax haven given relative differences in disclosure rules (US vis-à-vis other OECD countries) (bloomberg article)

Are lower US corporate taxes needed to attract back more US capital from abroad, despite all of these capital inflow drivers? Yes, because US corporate rates are not competitive. Moreover, because of the corporate inversion, many head office jobs have gone overseas.

This makes for interesting reading of some of the drivers involved in the flow of capital. Additionally, Dr. Caragata makes a case for lowering the US corporate tax rates, as despite the drivers, the rates are high compared to other OECD countries (note: the US corp tax rate at the highest margin was 39% in 2015, compared to the average for Europe of 18.7 percent).
In sharing Dr. Caragata’s note, another of our advisors, Vicky Willock, founder of Willock Partners, had this to say:

I heard very similar findings from the chief economist at Deutsche Bank this week in San Francisco. Companies should see the value of investing in the US as there is more optimism about our economy given the factors listed relative to other countries worldwide. The wild cards – possible terrorism events and who wins the US elections. Crude oil is expected to rise to about $55/barrel by the 4th quarter, but will be flat through the first half of the year. Technology stocks are expected to fuel growth for the US. With European countries dealing with their own qualitative easing to support their economies, with the Bank of Japan reducing interest rates to negative levels, and as the only country raising rates with another 50-75bp anticipated by year end, the US offers a “safer” haven than other places worldwide to park your capital. Sometimes it is important to remind clients that it is not all about uncertainty. Doing business with US companies or investors should be part of their overall strategy.

Despite the corporate tax rate, the US is a particularly safe place to invest, and none of these factors have taken into account some of the intangible variables, such as attraction of talent. The US attracts some of the top talent, the top companies, and the top investors, making it a desireable place to invest.

If you’re interested in entering the US market, let us know, we’re happy to have a conversation.

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