Two reasons why small US companies will not benefit from Trump Tax Reform

First, because the interbank interest rate, also known as Libor, is rising and second, because USD marks a day-to-day decline.

By mid October 2017, the performance of Russell 2000 was much better than the SP500 and it made sense: smaller companies tend to be focused locally than their big rivals with greater capitalization and as such are ready to take advantage of of the US corporate interest rate drop.

But around that time, the quarterly costs for Libor began rising and eventually reached 40 basis points in just over three months. Shortly thereafter, the Dollar Index headed south and sank to its lowest level since early 2015.

Peter Boockvar, Chief Investment Officer at the Bleakley Financial Group, said on Monday that more than 40 percent of small companies' debt is floating rate, so companies are highly susceptible to rising interbank interest rates, such as Libor. Although some of these companies have used derivatives to efficiently convert the floating rate into fixed obligations, they are still more sensitive to interest rates than their larger bondholders who have bonded in recent years. In addition, larger companies are reluctant to get support from the weakening of the dollar as their profits are realized abroad. For comparison, small companies rely on some imported goods and entirely on the local market.

Source: Bloomberg Pro Terminal

Jr Trader Petar Milanov

Bloomberg: Two Reasons Why Small Caps Are Not Cashing In On Tax Reform

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