Capital Gains, Grab Goes Public & US GDP Rises

Check out what happened in financial markets this week!

Quick Facts

📉🛬 Boeing: Grounded their 737 single-aisle plane due to electrical failures. This led to more turbulence for the company’s stock, despite finally having more new plane orders than cancellations this past month, after over a year of suppressed demand.

💊📈 GSK: Announced that they are well underway to split into two companies, one for over-the-counter drugs and one for pharmaceuticals, and also informed investors that they continued to beat profit expectations.

🎶🥵 Spotify: Management announced lower forward-estimates for the second quarter, after beating expectations in the first quarter. This highlights a growing challenge for tech companies to top last year’s insane growth on account of the pandemic.

🛩💸 General Dynamics: The large private jet maker which has struggled over the past year, has seen a surge in revenue in the first quarter, due to the easing of COVID restrictions.

🛢💰 Hess Corp: Their bet last year to store oil during the economic downturn paid off as their quarterly profits almost doubled analyst estimates.

Investors Await Capital Gains Plans

President Biden is expected to release details on a new plan for a higher capital gains tax this week to fund his economic plans.

The main part of Biden’s tax plan is to increase the top bracket tax rate from 20% to 39.6% on long-term capital gains. This would apply to all capital gains where the asset was held for over one year and if the taxpayer has more than $1 million in income. When this is combined with a medicare surtax on investment earnings the top federal tax rate would end up being 43.4%, double what it currently is.

Despite the rhetoric surrounding this tax hike, this higher rate would only affect .3% of taxpayers (about 540,000 people) reported an income of over $1 million in 2018. It’s also worth noting that 75% of all retail investments are in 401k’s and IRA’s which help investors avoid paying capital gains taxes.

Furthermore, although the proposal seeks to address capital gains of the uber-wealthy, it fails to address unrealized capital gains — a thorny subject amongst economists. It also fails to address the true issue behind wealth inequality that can arise with low capital gains tax: a little rule known as a “step-up in basis” at death.

This rule allows people to avoid capital gains taxes on gains by passing the asset down to their children at their death. When the heir has received the asset it is valued at current market value, which means that the gain has been nullified.

If President Biden’s plan does not include a change to this rule then the US is primed to lose $33 billion in tax revenue. However, if it does get tied into the capital gains tax increase then his new plan is expected to raise $113 billion over the decade starting in 2022.

Grab’s SPAC Challenges Valuations

Grab, Southeast Asia’s largest ride-hailing and delivery company, merged with a SPAC (special purpose acquisition company) backed by Alitmeter Capital Management. This was aimed at raising $4 billion in capital, which would give Grab a $40 billion valuation. This is double what it was valued at in 2020 and highlights how eager investors are to find the next SPAC opportunity.

The $4 billion was funded by three dozen different firms including BlackRock, Fidelity International, Temask and various wealthy Indonesian families.

Analysts are concerned by the rapid growth of Grab’s valuation and are worried if it should be valued as high as it is. One of the key things that analysts point out is that Grab has a valuation of 9 times its 2022 revenue, which is similar to its competitor DoorDash. However the big difference here is that DooDash is expected to be profitable in 2022 while Grab is still expected to be in the red. The counter argument to this is that Grab is part DoorDash and part Uber, which means that this valuation is fairer as there is room for rapid growth.

Last year, Grab avoided the SPAC route and approached JP Morgan and Morgan Stanley to try to IPO in 2021 and raise $2.5 billion. However, Grab started to be approached by different SPACs and they started to consider using the new hottest investment structure. They ended up using Evercore to choose which SPAC best aligned with them and how they were governed.This is how Grab got aligned with Alitmeter founder, Brad Gerstner who had invested in Uber and Facebook.

US GDP Back To Normal By Q2?

The US trade deficit in goods climbed to a record high this month, which suggests that trade was pulling down economic growth in the first quarter. With that said, this could have been offset with higher domestic demand. One of the main causes of this deficit is how the US is recovering from the pandemic faster than a lot of other countries. This has caused a spike in demands for imports from other countries as there is pent-up demand while exports have not seen as high of growth due to other countries not recovering as fast.

The goods trade deficit jumped 4% in March, which is the highest in the series. This jump was due to an increase in exports of $142 billion and an increase in imports by $232.6 billion. This was mainly due to an increase in demand for goods rather than services, such as motor vehicles and capital goods.One of the big drivers of the increase in consumption was the stimulus provided by the US government.

Economists expect that the goods trade deficit will remain large for the rest of the year as COVID restrictions start to ease and demand reverts back to traditional items. This means that the goods trade deficit should start to lower around the end of 2021 and beginning of 2022 as things start to shift back to pre-pandemic normalcy.

Even with the increase in the deficit, the US GDP increased 1.6% in the first quarter, priming it for a large boom this year. As vaccinations have continued and more and more people have started going out there has been an increase in spending again. Estimates put that all coronavirus-era economic losses will be recovered by the end of the second quarter.

The Bottom Line:

This is one of the largest growths in GDP in the past 40 years except for when businesses originally reopened last year and economists are cheering. The question will remain if the stock market’s valuations are high, even for the best case scenario of reopening the US economy?