us tax reform...in november showed its strongest yoy gain since march 2012. fig 1 data surprised...

Please refer to page 28 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

GLOBAL

In a nutshell

The Tax Cuts and Jobs Act (TCJA)

introduces upside risks to economic

growth and corporate earnings

We raise our 2018 real GDP growth

forecast to 2.6% (prev. 2.3%)

The effective corporate tax rate is

estimated to fall from 21% to 9% in

2018, but to rise subsequently

We estimate an ~7.7% positive impact

from tax reform on S&P 500 pro forma

after-tax earnings in 2018

Together with our economic forecast this

implies after-tax pro forma EPS growth

of ~15% in 2018

While a boost to 2018, the TCJA creates

a sequential headwind for annual after-

tax earnings growth from 2019 to 2022

The magnitude of impact varies

considerably across sub-sectors

We estimate the most favourable long-

term impacts for commercial services &

supplies, homebuilders, banks,

diversified financials, and utilities

5 January 2018

US tax reform Upside to growth and earnings We upgrade our estimate of 2018 real GDP growth to 2.6% (prev. 2.3%) (4Q on

4Q basis). Underpinning this is i) upside data surprises suggesting stronger

underlying growth, and ii) the finalized Tax Cuts and Jobs Act (TCJA) provides a

50 bp boost in 2018, 10 bp more than our prior forecast had outlined.

Housing and consumer spending continue to drive activity. The consumer in

particular should be strong as outlined in King Consumer: Stronger for longer –

the aging gorilla. Should business investment accelerate it could create further

upside to our estimates. While we have not modelled this, it is possible that a

lower effective tax rate and immediate 100% expensing pulls forward some

investment activity from future years.

Repatriation is less likely to provide a boost to business investment in our view,

but could lead to a stronger USD in 1H18. As a share of GDP, the potential funds

flow is about 1.8X greater than in 2005. The DXY rallied by more than 10% in

1H05.

Effective corporate tax rate – a sharp decline in 2018

The Penn Wharton Budget Model’s estimate suggests the US effective corporate

tax rate will decline from 21% to 9% in 2018. The devil is in the details, however,

and in 2019 through 2022 the effective corporate tax rate is estimated to move

higher from its 2018 low, averaging ~17% from 2022-30.

We estimate the resulting boost to US domestic after tax corporate profits at

~15% in 2018. The marginal year to year impact from 2019 through 2022,

however, is negative due to the rising effective corporate tax rate.

S&P 500 overall earnings and subsector impacts

Our estimated impact on S&P 500 pro forma after tax earnings in 2018 is 7.7%,

less substantial than the estimate for the broader US business sector. First, ~36

percent of its revenues are earned abroad. Second, the manufacturing sector

experiences only a modest decline in its effective corporate tax rate.

As is the case for the broader economy, in subsequent years, however, a

headwind is created for after-tax earnings growth. Our estimates focus on

underlying corporate profitability and exclude the impacts of one-time items such

as i) writedowns to deferred tax assets and liabilities, and ii) charges related to the

repatriation of earnings abroad.

Together with our economic forecast, this suggests S&P 500 pro forma after tax

EPS growth of ~15% in 2018. This yields an EPS estimate of $151 for the year.

Earnings growth is likely to moderate in subsequent years as the boost from the

TCJA fades and becomes a sequential headwind.

Estimates of impacts at the sub-sector level vary depending on the decline in the

effective corporate tax rate and the share of revenue earned in the US. In the

long-term most favourable impacts are estimated for i) Commercial services &

supplies, ii) Homebuilders, iii) Banks, iv) Diversified financials, and v) Utilities.

Least favourable impacts long-term are estimated for i) Semiconductors, ii) Tech

hardware & equipment, iii) Household & personal products, and iv) Capital goods.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management US tax reform

5 January 2018 2

Section Title Key Takeaway/Description page #

I US real GDP forecast updateEstimate for 4Q17 increased to 3.0% (prev. 2.4%); 2018 (4Q on 4Q basis)

forecast increased to 2.6% (prev. 2.3%)3

II Economic Impacts from the TCJA

The stimulus is front-loaded. There is an incremental boost to GDP of 0.5%

in 2018 and a further 0.1% in 2019. Beyond this a slight incremental

headwind to growth

4

IIICorporate investment and repatriation

impacts

A discussion of how corporate investment may be impacated by the TCJA

and what the impact of repatriation may be on USD fund flows6

IVDescription of key measures impacting

corporate earnings

An item by item rundown of the key changes impacting corporate earnings in

the TCJA7

V US effective corporate tax rateIs estimated to fall from 21.2% in 2017 to 9.2% in 2018. However, in

subsequent years it grinds higher and averages ~17% from 2022-20309

VICorporate taxes: Industry and sub-sector

impacts in 2018

Our mapping of NAICS industries to the S&P 500 suggests an 8.8 percentage

point decline in its effective tax rate in 2018 and a 7.7% boost to earnings.

There is considerable variation in the estimated impacts for 31 subsectors

10

VIICorporate taxes: Long-term impacts on S&P

500 earnings

After the boost to earnings in 2018, the TCJA creates an incremental

headwind for earnings growth in subsequent years. Again, there is

considerable variation in the estimated impacts for 31 subsectors

13

VIIIStock and sub-sector commentary from our

analyst teamInsights from research produced on the TCJA by our US analyst team 15

Appendix 1 Key elements and changes in the TCJA

An item by item comparison of the key changes relative to 2017. Also a

discussion of what changed in the finalized TCJA relative to previous versions

of the bill that separately passed the House and the Senate

20

Appendix 2 Estimation of economic impact from TCJAA discussion of how we estimate the economic impulse resulting from the

TCJA22

Appendix 3 Individual tax reform nuancesData on how different income groups are impacted over time as a result of the

TCJA23

Appendix 4Corporate tax reform measure impacts on

government revenue

Estimates from the Joint Committee on Taxation of the annual impact on

government revenues from specific tax measures impacting corporates24

Appendix 5Industry tables on effective corporate taxes

and earnings (NAICS basis)

Detailed tables on effective corporate taxes and earnings by industry (NAICS

basis). These estimates inform our work on S&P 500 earnings growth25

Table of Contents


5 January 2018 3

I – US real GDP forecast update

4Q17 data is tracking at around 3.0%

Economic data has been robust since our last forecast update. Data from 4Q17 has been strong even

relative to the seasonal upward surprises that have occurred in 4Q since 2010 (Fig 1). Much of this

has come from two areas which we see continuing to drive growth ahead: housing investment and

consumer spending. We raise our 4Q17 real GDP estimate to 3.0% (prev. 2.4%). Our 2017 YoY real

GDP estimate rises to 2.7% (prev. 2.5%) (4Q on 4Q basis).

On the housing investment side, the NAHB Housing Market Index reached its highest level since 1999

in December, single family housing starts and permits both reached fresh cycle highs in November,

and residential mortgage credit growth continues to show steady improvement. Meanwhile, real

consumer spending appears to be tracking at a pace of ~3.0% annualized in 4Q. Notably, retail sales

in November showed its strongest YoY gain since March 2012.

Fig 1 Data surprised substantially on the upside in 4Q17 relative to prior years

Source: Bloomberg, Macquarie Research, January 2018

Upgrading our 2018 real GDP growth forecast to 2.6% (prev. 2.3%) (4Q on 4Q basis)

We upgrade our 2018 forecast for real GDP growth by 30 bps. First, stronger data means that the

economy is exiting 2017 with greater momentum, contributing 20 bps. Second, the final tax reform

legislation provides a 10 bp stronger economic boost in 2018 than our previous forecast had

suggested. We now see an impact of ~0.5% to real GDP in 2018 (vs. 0.4% previously).

Fig 2 Changes to our real GDP forecast and quarterly profile

Source: Bloomberg, Macquarie Research, January 2018

-80

-60

-40

-20

0

20

40

60

80

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2017

Avg. 2010-16

Citigroup Economic Surpise Index - United States

2.8

2.3

2.5

2.3 2.3

2.6

2.32.4

2.32.4

2.3 2.3

2.5

2.3

3.1

2.9

2.7

2.4 2.4

2.72.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4Q17 1Q18 2Q18 3Q18 4Q18 2017 (4Q on 4Q) 2018 (4Q on 4Q)

United States - Real GDP growth forecasts (QoQ annualized)consensus

Macq. (prev)

Macq. (current)


5 January 2018 4

II - Economic Impacts from the TCJA

The deficit is likely to widen in the near-term

As a starting point for estimating the economic impact from the Tax Cuts and Jobs Act, we capture the

change in the projection for the deficit relative to current law. As Fig 3 demonstrates, the difference is

greatest in the near-term and then narrows considerably. This suggests the Act creates a near-term

stimulus, but then actually results in tighter fiscal policy in 2023 to 2027.

Fig 3 Near-term the deficit should widen as a result of the TCJA

Source: Congressional Budget Office, Macquarie Research, January 2018

The stimulus from the Act is front loaded, providing a substantial boost to 2018 growth

We use estimates from the Congressional Budget Office (CBO) that break down the source of the

deficit increase into two components: i) Tax changes for individuals, and ii) Business related tax

changes. We adjust the CBO numbers to align with calendar year and then estimate multipliers for

these components. Our estimates are 0.47 for the tax changes to individuals and 0.2 for the corporate

tax changes. Greater detail on our calculation can be found in Appendix 2 (page 22).

The output of this analysis is presented below and illustrates the “front loaded” nature of the stimulus.

We estimate that it will provide a 0.5% boost to GDP in 2018, a further marginal 0.1% boost in 2019.

In 2020 the impact pivots to a very modest fiscal tightening, which becomes more substantial from

2025 to 2027.

Fig 4 Marginal (year to year) impacts on nominal GDP growth from the TCJA


-12

-10

-8

-6

-4

-2

0

2

4

1990 1992 1995 1997 2000 2002 2005 2007 2010 2012 2015 2017 2020 2022 2025 2027

Federal surplus or deficit as a share of GDP (%)

CBO baselineproj.

with TCJA

0.5%

0.1%

0.0% 0.0% 0.0% 0.0% 0.0%-0.1%

-0.1%-0.1%

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Impact on calendar year nominal GDP growth from the Tax Cuts and Jobs Act


5 January 2018 5

Much of this is likely to flow through the consumer spending channel

We estimate the tax cut bill will provide a boost to consumer spending of ~0.6% of GDP (0.5

percentage points in 2018 and a further 0.1 percentage points in 2019). Part of this in our assessment

will leak out and become a global stimulus as it should lead to firmer imports.

This leakage through the import channel, however, should be offset by a modestly firmer pace of

capital expenditures (please see discussion of corporate investment on page 6). We emphasize that

this component of the improvement should be relatively modest. We see the marginal propensity to

invest from corporates as being relatively low.

As outlined in King Consumer – Stronger for longer: The aging gorilla, fundamentals for consumer

spending are as robust as ever, underpinned by persistent downward pressure on unemployment and

positive real wage growth. A tax cut in 2018 will add more fuel to this already compelling fire.

Figure 5 presents our estimates of the results by income grouping. These suggest that on net for

2018, the tax cuts should increase consumer spending by ~$137 billion (~0.6% of GDP). This is

consistent with the estimates on the previous page (0.5 ppt impact in 2018 and a further 0.1 ppt

impact in 2019).

Some tax filers will pay higher taxes and much of the tax relief expires over time

While consumers will benefit in aggregate across the income distribution, there are stark differences at

the individual level. The Tax Policy Center estimates that in 2018, ~5% of tax filers will face higher

taxes as a result of the bill, while ~80% will face lower taxes.

This largely stems from the suspension and reform of some itemized deductions and income

exclusions. Particularly prominent amongst this is i) a $10,000 deduction limit to State and local

property taxes and sales taxes, ii) a limit to the deduction available for mortgage interest.

The impacts change by 2027 as some of the personal tax measures expire. Analysis from the Tax

Policy Center suggests during this year, only about 25% of tax units will face lower taxes, while more

than 50% of tax units will face higher taxes. For a more fulsome discussion of this topic please see

Appendix 3 (page 23).

Fig 5 The final tax bill should boost consumer spending by ~0.6% of GDP

Source: Tax Policy Center, Macquarie Research, December 2017

Average federal tax

reduction

Number of tax

filers (millions)

Total

incremental

$s (billions)

Marginal

propensity

to consume

(est.)

Increase to

consumer

spending

(billions)

A B C=A*B D E=C*D

Lowest quintile $60 28 $1.7 100% $2

Second quintile $380 28 $10.6 100% $11

Middle quintile $930 28 $26.0 75% $20

Fourth quintile $1,810 28 $50.7 50% $25

80-90 $2,970 14 $41.6 50% $21

90-95 $4,550 7 $31.9 40% $13

95-99 $13,480 5.6 $75.5 30% $23

0.1 to 1st percentile $51,140 1.4 $71.6 25% $18

top 0.1% $193,380 0.14 $27.1 20% $5

Total 140 $337 $137

2018 calendar year impact by income group


5 January 2018 6

III – Corporate investment and repatriation impacts

Corporate investment

Some have suggested that the tax bill will create a large boost through stronger business investment.

We are less optimistic on the potential for improvements through this channel.

First, business investment is already stretched as a share of GDP, particularly the cyclical components

that tend to rise with the economic cycle. Such a dynamic makes it more difficult for this area of the

economy to grow disproportionately.

Second, we don’t believe there is a strong marginal propensity to invest from corporates. Corporate

profit growth has been strong in most years since the financial crisis and lending growth to businesses

has been robust. Access to capital does not appear to have been a significant constraint on

investment.

One item that could lead to greater corporate investment is the timing in the shift in the effective

corporate tax rate. This declines substantially in 2018, before roughly two-thirds is retraced by 2022.

Alongside the provision that allows for 100% immediate expensing of assets for five years, this could

lead the business sector to invest more in the early years covered by the bill. There is greater

incentive to invest (and make profit) before 2022 then after 2022.

Repatriation and the USD

The Congressional Research Service (CRS) has outlined the impact of the special one-time

repatriation rate that occurred in 2005 as a result of the American Jobs Creation Act of 2004. This act

“provided a deduction equal to 85% of the increase in foreign-source earnings repatriated. For a firm

paying taxes at the 35% corporate tax rate, this reduced the tax rate on repatriated earnings to the

equivalent of 5.25%.”

In terms of the impact, the actual experience of 2005 showed that ~$312 billion in qualified earnings

was repatriated in the tax year following the enactment. This represented roughly one-third of the total

amount of offshore earnings.

The Joint Committee on Taxation estimates foreign source earnings at $2.6 trillion. Applying the same

percentage of repatriation as what occurred in 2005 would suggest a flow of ~$860 billion into USD as

a consequence in 2018. This would be approximately ~2.75X the flow that occurred in 2005.

As a share of nominal GDP, the estimate of the amount repatriated was ~2.4% in 2005. By way of

contrast, the estimate for 2018 would be ~ 4.3% GDP. On this basis, the potential funds flow is about

1.8X as large as in 2005.

One caveat to this analysis and these numbers is that foreign source earnings could be USD hedged.

As a result the fund flow impact may be less significant than the headline analysis suggests. However,

the relative impact on 2017 vs. 2005 should remain significant, again suggesting a boost to the USD

as this is what occurred in 2005 (the DXY rallied more than 10% in 1H05).


5 January 2018 7

IV - Descriptions of key measures impacting corporate earnings

Key items encompassed within corporate and international tax reform include: i) the corporate income

tax rate cut and the repeal of the alternative minimum tax, ii) a limitation on net interest deductions, iii)

modification of rules for expensing business assets, and iv) a reduction in the tax on the repatriation of

assets.

For a more fulsome specific understanding of these and other technical points, we point the reader

towards a document published by KPMG on 22-December 2017 and publicly available through its

website New Tax Law (H.R. 1) – Initial Observations.

Below we provide a summary of our understanding of the key elements impacting corporate and

international earnings.

i) Corporate income tax rate cut and repeal of corporate alternative minimum tax

Core to the tax reform as it relates to corporates is the permanent reduction in the corporate

income tax rate from 35% to 21%. The rate reduction generally took effect on January 1, 2018.

The corporate alternative minimum tax was also repealed. Previously, this tax limited the use of

deductions.

ii) Limitation on net interest deductions

The new tax law also disallows a deduction for net business interest expense of any taxpayer in

excess of 30% of a business’s adjusted taxable income plus floor plan financing interest.

KPMG highlights that that “the new law starts with a broader definition of adjustable taxable

income, but significantly narrows the definition beginning in 2022”.

There are some companies that are exempt from this limitation. This includes some small

businesses and as KPMG emphasizes “certain regulated public utilities and electric

cooperatives”.

iii) Modification of rules for expensing depreciable business assets

Bonus depreciation (also referred to as ‘immediate expensing’) percentage is increased from

50% to 100% for property acquired and placed in service after September 27, 2017, and before

2023.

This is phased down gradually in the subsequent years to 80% (2023), 60% (2024), 40% (2025),

20% (2026 and beyond).

iv) Repeal of section 199 domestic manufacturing deduction

As KPMG indicates “Congress’s intent in enacting section 199 was to provide a targeted

corporate rate reduction that would allow US companies to compete against international tax

systems while also drawing international companies to the United States and its tax structure”.

With the broader corporate tax rate reduction, this element was no longer likely to be as

impactful. Its repeal is partly why the effective corporate tax rate for manufacturing sees one of

the smallest percentage point declines of all sectors. (See page 18).


5 January 2018 8

v) Carryover of net operating losses

The new law limits the net operating loss deduction for a given year to 80% of taxable income,

effective with respect to losses arising in tax years beginning after December 31, 2017. This

limitation is similar to the current 90% limitation.

The new law also repeals the current carry back provisions for net operating losses, but allows

for indefinite carryover.

As KPMG indicates “The changes to the net operating loss carryover provisions possibly may

have a significant effect on the financial statement treatment of loss carryovers incurred in future

tax years, given that unused loss carryovers no longer expire.”

vi) Deductibility of business entertainment expenses

The new law repeals deductions for entertainment, amusement, and recreation when directly

related to the conduct of a taxpayer’s trade or business.

The new law provides that no deduction is allowed for i) an activity considered entertainment,

amusement or recreation, ii) membership dues for any club organized for business, pleasure,

recreation, or other social purposes, or iii) a facility or portion of a facility used in connection with

any of the above.

vii) Capitalization of research or experimental expenditures

The new law provides that specified research or experimental expenditures paid or incurred in

tax years beginning after 2021 should be capitalized and amortized over a five-year period.

Under the current law, a taxpayer may expense the cost or elect to treat the cost as a deferred

expense.

The JCT has estimated that this provision will raise approximately $119.7bn in the 10-year

budget window.

viii) International measures

The new law also include four key international reforms that have an impact on multinational

corporations. These are designed to start to shift towards a territorial tax system.

Repatriation rates (one-time). The one-time change to the rates charged on repatriation of

previous earnings, earned abroad. A 15.5% rate applies to earnings attributable to liquid assets

and an 8% rate applies to earnings attributable to illiquid assets. Previous taxes paid to foreign

governments on these earnings are deductible through a foreign tax credit.

Base Erosion Anti-Abuse tax. This is aimed at corporations that shift profit to other tax

jurisdictions in an attempt to lower their US taxes. It imposes a minimum tax on certain

deductible payments made to foreign affiliates.

KPMG provides an example for banks and registered securities dealers, which “are subject to a

one percentage point higher BEAT rate in every year”. This starts at 6% in 2018 and rises

steadily to 13% in 2025.

Minimum tax on Global intangible low tax income (GILTI). This defines GILTI as foreign income

LESS 10%*foreign assets. GILTI is effectively the excess income that foreign assets earn above

a 10% “rate of routine return”. Only half of a company’s GILTI is taxable until 2025. The taxable

percentage increases in subsequent years.

Dividend received deduction. This has the effect of reducing US taxes paid on foreign earnings.

It allows a 100% tax deduction on certain deemed dividends received from foreign sources.


5 January 2018 9

V – US effective corporate tax rate

The Joint Committee on Taxation estimates that from 2018 through 2027 the impact of federal

government revenues from domestic corporates will be a reduction by an aggregate amount of ~$654

billion with various subcomponents contributing different amounts to the analysis. Detailed estimates

on an item by item (and year by year) basis can be found in Appendix 4 (page 24)

However, the impact will be the strongest in 2018 due to the timing of different provisions and their

expiry. The Penn Wharton Budget model estimates that the effective corporate tax rate for this year

will fall from 21.18% to 9.16% (Fig 6). This represents a 43% fall in the effective corporate tax rate.

This estimate of the effective corporate tax rate then climbs higher year over year through 2022 due to

the expiry of some temporary provisions (Fig 7). The largest jump occurs in 2022. First, this is when

the 100% bonus depreciation rule first begins to phase down. Second, this is when the definition of

taxable income narrows considerably (this means decreased deductions from net business interest

expenses).

Fig 6 US effective corporate tax rate under previous law vs. with the TCJA

Source: Penn Wharton Budget Model, Macquarie Research, January 2018

Fig 7 Year on year percentage point change in effective corporate tax rate


0

5

10

15

20

25

30

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

previous law

Tax Cuts and Jobs Act

US effective corporate tax rate (%)

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Year over year percentage point change in US effective corporate tax rate (%)

previous law

Tax Cuts and Jobs Act


5 January 2018 10

VI - Corporate taxes: Industry and sub-sector impacts in 2018

Industry estimates from the Penn Wharton Budget Model

The Penn Wharton Budget model also provides estimates of the impacts to the industries in the

national income and product accounts. Please note that the classification used in these accounts

differs somewhat from that used in common stock market investment indices such as the S&P 500.

The providers of the model note that it “uses publicly available data from the National Income and

Product Accounts (NIPA) and Statistics of Income (SOI) to project book income and taxes paid.”

This shows that the largest percentage point change in 2018 tax rates (from 2017) will occur in i) Real

estate rental and leasing, ii) Agriculture, forestry, fishing, and hunting, iii) Other services, iv) Utilities, v)

Health care & social assistance, and vi) Transportation & warehousing.

In contrast, the smallest percentage point change occurs in i) Manufacturing, ii) Accommodation and

food services, iii) Management of companies (holding companies), iv) Mining, and v) Information.

The results are similar when we analyse the potential impact of the lower effective corporate tax rates

on after-tax corporate earnings by sector. The results vary from 20% for real estate rental and leasing

(on the high end) to 7.2% for manufacturing (on the low end).

For details on each NAICS industry please see Appendix 5 (pages 25-27).

Mapping industry impacts to the S&P 500

While helpful as an initial starting point, the estimates provided aren’t immediately translatable to the

investment landscape. This is because government industry accounting uses the North American

Industry Classification System (NAICS). This differs somewhat from how traditional equity indices are

constructed. The S&P 500, for example, uses the Global Industry Classification System (GICS).

To enable us to provide additional insight, we have mapped NAICS sectors to appropriate S&P 500

sub-sectors. This mapping is outlined below (Figure 8). In some instances, multiple NAICS sectors

mapped to the relevant S&P 500 sectors. In these instances we used a blended impact from the

NAICS mapping.

After conducting this mapping, we are able to estimate (using the NAICS estimates from the Penn

Wharton Budget Model), the change in the effective tax rates by S&P 500 sub-sectors and then the

after tax earnings impacts on US earnings.

We estimate ~7.7% positive impact on pro forma after-tax earnings in 2018 for the S&P 500

Combining these calculations with the share of revenue each sub-sector gains from the United States

allows us to estimate the after tax earnings impacts at the sub-sector from the bill. This suggests that

earnings impacts range from a low of 1.0% in semiconductors and semiconductor equipment to a

higher of 16.7% for the real estate sector.

In aggregate our mapping suggests a positive impact on S&P 500 earnings of 7.7% in 2018.

This is driven by a ~8.8 percentage point decline in the effective tax rate for 2018 and on US

domiciled revenues representing ~64% of the total.

Please note that this estimate is exclusive of one time changes that might occur as a result of the

repatriation tax and writedowns to deferred tax assets.


5 January 2018 11

Fig 8 Impact on 2018 earnings for S&P 500 sub-sectors from the TCJA

Source: Penn Wharton Budget Model, BEA, Bloomberg, Macquarie Research, January 2018

S&P 500 Subsector NAICS mapping

Share of

revenue from

US (%)

2018 percentage

point impact on

effective tax rate

2018 after tax

earnings

impact (US)

2018 after tax

earnings

impact (total)

Share of

S&P 500

market cap

Automobiles & Components Manufacturing 63% -6.0% 7.2% 4.6% 0.7%

Banks Finance and Insurance 82% -11.2% 15.0% 12.3% 6.6%

Capital Goods Manufacturing 55% -6.0% 7.2% 4.0% 7.4%

Commercial Services & Supplies Admin and Support and Waste Management 94% -11.1% 14.7% 13.8% 0.3%

Professional Services PST services 74% -10.3% 13.6% 10.1% 0.3%

Consumer durables & apparel ex homebuilders Manufacturing 61% -6.0% 7.2% 4.4% 1.0%

Homebuilders Construction 100% -11.8% 16.3% 16.3% 0.2%

Consumer services ex Casinos & Gaming Accommodation and food services 64% -6.3% 7.4% 4.7% 1.8%

Casinos & Gaming Arts, recreation, and entertainment 58% -10.5% 14.2% 8.2% 0.2%

Diversified Financials Fin & Insu (54%), Mgmt of companies (46%) 76% -9.4% 12.0% 9.1% 5.2%

Energy Mining, quarrying, and oil and gas extraction 58% -7.6% 8.9% 5.1% 5.9%

Food & Staples Retailing Retail Trade 84% -11.3% 15.4% 12.9% 2.4%

Food Beverage & Tobacco Manufacturing 58% -6.0% 7.2% 4.2% 4.8%

Health Care Equipment & Services Manuf (50%), HC & social assistance (50%) 90% -9.1% 12.1% 10.9% 5.6%

Household & Personal Products Manufacturing 44% -6.0% 7.2% 3.1% 1.8%

Insurance Finance and Insurance 70% -11.2% 15.0% 10.5% 2.6%

Materials - Manufacturing Manufacturing 64% -6.0% 7.2% 4.6% 1.4%

Materials - Agriculture Agriculture, forestry, fishing, huning 43% -12.7% 17.9% 7.7% 1.2%

Materials - Mining Mining, quarrying, and oil and gas extraction 43% -7.6% 8.9% 3.8% 0.4%

Media Information 78% -8.9% 11.3% 8.9% 2.8%

Pharmaceuticals, Biotech, & Life Sciences Manufacturing (65%), PST services (35%) 56% -7.5% 9.5% 5.3% 8.0%

Real Estate Real estate and rental and leasing 83% -14.9% 20.0% 16.7% 2.9%

Retailing Retail Trade 86% -11.3% 15.4% 13.2% 6.0%

Semiconductors & Semiconductor equipment Manufacturing 14% -6.0% 7.2% 1.0% 3.8%

Internet Software & Services Information 46% -8.9% 11.3% 5.2% 4.9%

IT services PST Services 49% -10.3% 13.6% 6.7% 4.1%

Software Information 53% -8.9% 11.3% 6.0% 5.3%

Technology Hardware & Equipment Manufacturing 39% -6.0% 7.2% 2.8% 5.5%

Telecommunications Services Information 97% -8.9% 11.3% 11.0% 2.0%

Transportation Transportation & Warehousing 75% -12.1% 16.7% 12.6% 2.2%

Utilities Utilities 95% -12.4% 17.1% 16.3% 2.8%

S&P 500 64% -8.8% 11.4% 7.7% 100.0%


5 January 2018 12

2018 earnings impacts show considerable variation at the subsector level

In the figure below, we present the results of our analysis by S&P 500 subsector in another manner.

This is a plot of each sector along the two dimensions that benefit each’s earnings. The first dimension

(the vertical axis) is the percentage point change in the effective tax rate. The second dimension

(horizontal axis) is the share of revenue that is generated from within the United States.

Sectors towards the right and near the bottom (such as Real Estate, Utilities, and Homebuilders) are

prone to benefit more. Meanwhile sectors near the top and to the left (such as Semiconductors, and

Technology hardware and equipment) are poised to benefit the least in 2018.

Fig 9 A plot of sub-industries: Change in effective tax rate vs. share of revenue from US


Autos

Banks

Capital Goods

Com Svcs & supplies

Prof Svcs

Cons durables & apparel

Homebuilders

Consumer svcs

Casinos

Dvsfd Finls

Energy

Food & Staples Retailing

Food Beverage & Tobacco

HC Equip & Svcs

HH & Personal Products

Insurance

Materials -Manu

Materials - Ag

Materials - Mining

Media

Pharma

Real Estate

Retailing

Semiconductors

Internet Soft & Svcs

IT Svcs

Software

Tech hardware & equip

Telecom

TransportationUtil

-16%

-14%

-12%

-10%

-8%

-6%

-4%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Share of revenue from United States

Perc

en

tag

e p

oin

t ch

an

ge in

eff

ecti

ve

tax r

ate


5 January 2018 13

VII - Corporate taxes: Long-term impacts on S&P 500 earnings

We use our mapping and concordance system in conjunction with the Penn Wharton Budget Model’s

estimate of the evolution of effective corporate tax rates over time to generate estimates of the impact

on S&P 500 sub-sector (and overall earnings growth) over time.

On the aggregate index, the peak impact occurs in 2018. Following this there is a gradual decline in

each year before 2022 (there is an incremental headwind to earnings growth in each of 2019, 2020,

2021, 2022). In 2022 there is a large step down and then again a gradual decline before the impact

stabilizes in ~2024-25. Driving the gradual decline are changes in tax rules such as changes in rules

limiting net interest deductions and the phasing out of bonus depreciation.

Figure 10 reveals that estimates of the earnings impact are different for the various subsectors

and change over time. For example, by 2027, the most substantial positive impact (relative to the

2017 baseline) is in the i) Commercial services and supplies, ii) Banks, iii) Homebuilders, iv)

Diversified Financials, v) Retailing, and vi) Utilities.

In contrast, the least positive impact in 2027 is in the i) Semiconductors and semiconductor

equipment, ii) Technology, hardware & equipment iii) Household and personal products iv) Capital

goods, v) Food beverage & tobacco, vi) Consumer durables & apparel (excluding homebuilders), vii)

Materials – manufacturing, and viii) Automobiles & components. Our estimates suggest a less than

1% annual earnings impact for each of these eight subsectors for 2023 through 2027 (relative to the

2017 baseline).

Figure 11 illustrates our estimate of the impact on S&P 500 after-tax earnings growth for each year

from 2018 through 2027. While the boost to earnings is significant upfront at nearly 8% for 2018,

incremental headwinds exist for the subsequent years.

Figure 12 presents a scatterplot of our estimates for near-term (2018) earnings impact by sub-sector

relative to the long-term (2027) earnings impact by subsector.

Fig 10 Estimated earnings impact relative to 2017 by sub-sector from the TCJA


2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Automobiles & Components 4.6% 4.5% 4.0% 3.7% 1.1% 0.8% 0.7% 0.8% 0.6% 0.8%

Banks 12.3% 12.0% 11.1% 10.2% 6.0% 5.2% 4.9% 5.3% 5.3% 5.8%

Capital Goods 4.0% 3.9% 3.5% 3.2% 1.0% 0.7% 0.6% 0.7% 0.6% 0.7%

Commercial Services & Supplies 13.8% 13.5% 12.4% 11.5% 7.2% 6.5% 6.2% 6.7% 6.8% 7.2%

Professional Services 10.1% 9.8% 8.9% 8.1% 3.2% 2.5% 2.2% 2.4% 2.4% 2.7%

Consumer durables & apparel ex homebuilders 4.4% 4.3% 3.9% 3.6% 1.1% 0.8% 0.6% 0.7% 0.6% 0.8%

Homebuilders 16.3% 15.9% 14.5% 13.3% 7.2% 5.9% 5.2% 5.5% 5.3% 5.8%

Consumer services ex Casinos & Gaming 4.7% 4.7% 4.3% 4.1% 3.4% 3.1% 3.0% 3.1% 3.1% 3.3%

Casinos & Gaming 8.2% 8.0% 7.1% 6.5% 3.0% 2.3% 1.9% 2.0% 1.9% 2.2%

Diversified Financials 9.1% 8.9% 8.3% 7.8% 5.3% 5.0% 4.9% 5.2% 5.2% 5.6%

Energy 5.1% 5.2% 4.0% 3.5% 2.4% 2.1% 1.8% 2.2% 2.7% 2.7%

Food & Staples Retailing 12.9% 12.6% 11.6% 10.8% 6.2% 5.4% 4.9% 5.1% 4.8% 5.1%

Food Beverage & Tobacco 4.2% 4.1% 3.7% 3.4% 1.0% 0.7% 0.6% 0.7% 0.6% 0.7%

Health Care Equipment & Services 10.9% 10.7% 9.7% 9.0% 4.3% 3.6% 3.2% 3.4% 3.3% 3.6%

Household & Personal Products 3.1% 3.1% 2.8% 2.5% 0.8% 0.6% 0.5% 0.5% 0.4% 0.6%

Insurance 10.5% 10.2% 9.5% 8.7% 5.1% 4.4% 4.1% 4.5% 4.5% 4.9%

Materials - Manufacturing 4.6% 4.5% 4.1% 3.7% 1.1% 0.8% 0.7% 0.8% 0.6% 0.8%

Materials - Agriculture 7.7% 7.5% 6.9% 6.4% 3.5% 3.0% 2.7% 2.8% 2.7% 2.9%

Materials - Mining 3.8% 3.9% 3.0% 2.6% 1.8% 1.5% 1.3% 1.6% 2.0% 2.0%

Media 8.9% 8.6% 7.8% 7.1% 2.9% 2.3% 2.1% 2.5% 2.5% 2.9%

Pharmaceuticals, Biotech, & Life Sciences 5.3% 5.2% 4.7% 4.3% 1.5% 1.1% 1.0% 1.1% 1.0% 1.2%

Real Estate 16.7% 16.5% 12.0% 10.4% 4.6% 3.0% 2.2% 2.3% 2.0% 2.4%

Retailing 13.2% 12.9% 11.9% 11.1% 6.3% 5.5% 5.0% 5.2% 4.9% 5.3%

Semiconductors & Semiconductor equipment 1.0% 1.0% 0.9% 0.8% 0.3% 0.2% 0.2% 0.2% 0.1% 0.2%

Internet Software & Services 5.2% 5.1% 4.6% 4.2% 1.7% 1.4% 1.2% 1.5% 1.5% 1.7%

IT services 6.7% 6.5% 5.9% 5.4% 2.1% 1.6% 1.5% 1.6% 1.6% 1.8%

Software 6.0% 5.9% 5.3% 4.8% 1.9% 1.6% 1.4% 1.7% 1.7% 1.9%

Technology Hardware & Equipment 2.8% 2.8% 2.5% 2.3% 0.7% 0.5% 0.4% 0.5% 0.4% 0.5%

Telecommunications Services 11.0% 10.7% 9.6% 8.8% 3.5% 2.9% 2.6% 3.1% 3.1% 3.5%

Transportation 12.6% 12.3% 11.2% 10.5% 6.0% 5.1% 4.5% 4.6% 4.4% 4.7%

Utilities 16.3% 15.8% 14.2% 13.2% 7.4% 6.0% 5.2% 5.3% 5.0% 5.3%

S&P 500 7.7% 7.6% 6.8% 6.2% 3.1% 2.6% 2.3% 2.5% 2.5% 2.7%

S&P 500 subsector -earnings impact relative to 2017 of Tax Cuts and Jobs Act


5 January 2018 14

Fig 11 Impact on S&P 500 earnings growth from the TCJA


Fig 12 Subsector plot: 2018 earnings impact vs. 2027 earnings impact


-4%

-2%

0%

2%

4%

6%

8%

10%

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Estimate of S&P 500 annual earnings growth impact from the TCJA

Autos

Banks

Capital Goods

Com Svcs & supplies

Prof Svcs

Cons durables & apparel

Homebuilders

Consumer svcs

Casinos

Dvsfd Finls

Energy

Food & Staples Retailing

Food Beverage …

HC Equip & Svcs

HH & Personal …

Insurance

Materials - Manu

Materials - Ag

Materials -Mining

Media

Pharma

Real Estate

Retailing

Semiconductors

Internet Soft & Svcs IT Svcs

Software

Tech hardware & equip

Telecom

Transportation

Util

0%

1%

2%

3%

4%

5%

6%

7%

8%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

2027 e

arn

ing

sim

pact

2018 earnings impact


5 January 2018 15

VIII - Stock and sub-sector commentary from our analyst team

For more specific colour on the impacts to different sub-sectors and companies, we point the reader

towards the more than 20 research notes written by our US analyst team over the last several weeks.

Cursory summaries of these notes are provided below.

Industrials

US Airlines (Susan Donofrio)

Susan notes in U.S. Airlines – Tax reform: Focusing on the bottom line that all nine publically-traded

US airlines under coverage would benefit greatly from a 21% tax rate given that they currently all pay

a much higher tax rate (Susan estimates this to be in the range of 35% and 38%.

Holding all else constant, a 21% tax rate applied to our 2018 estimates results in a ~25% increase in

EPS on average, with relatively little variation from carrier to carrier.

Business Services Sector (Hamzah Mazari)

Hamzah provides takeaways on the Republican Tax Plan in Business Services Sector – Uncle Sam

Gives Back highlighting stocks where there remains upside simply based on cash tax savings.

FactSet Research Systems (FDS US, Hamzah Mazari)

Hamzah highlights in FactSet Research Systems – 1FQ18: The Good, the Bad, and the Outlook that

US tax reform should be a decent benefit although FDS does not quantify the benefit.

Some further colour is provided. Hamzah’s sense is that tax reform could provide a cash savings of

~$40mm. FDS highlighted ~40% of pre-tax income is overseas, while the remainder stems from the

US.

Hamzah believes the company will use cash tax savings proceeds to both reinvest in the business and

return to shareowners through buybacks.

Robert Half International (RHI US, Hamzah Mazari)

Hamzah estimates that a lower corporate tax rate is worth ~$12/share in Robert Half International –

Adapt or Die (Secular Headwinds Accelerating) and believes that current valuation already bakes in

the benefits from US tax reform.

Waste Management (WM US, Hamzah Mazari)

Hamzah estimates that US tax reform could structurally add as much as ~$350mn in cash tax savings

in Waste Management – Cash Is Always King.

Navistar International (NAV US, Sameer Rathod)

Sameer increases his EPS estimates primarily due to a lower tax rate assumption on the back of the

tax reform, as well as higher operating margins in their truck business (3.1% vs 2% previously) in

Navistar International – Solid quarter.


5 January 2018 16

Consumer

Gaming, Lodging & Theatres (Chad Beynon)

Chad Beynon highlights companies in his coverage list that are impacted from the reduction in the

corporate tax rate to 21% from 35%, the limit on net interest deductions, and the lower tax imposed on

repatriation of overseas profits in Gaming, Lodging & Theatres – Winners and bigger winners.

From a direct cash flow standpoint, Chad believes the companies that may save the most in cash

taxes as a % of market cap are IGT, RGC, HLT, STAY, CNK, IMAX, MCRI and H.

Consumer Staples (Caroline Levy)

Caroline highlights the winners and losers of tax reform in Tax reform winners & losers – Good for

EPS, hit to cash flow.

Caroline highlights CHD, KMB, SAM, DPS and MNST as the biggest gainers from the lower corporate

tax rate alone. Caroline also notes that repatriation and accelerated depreciation may lead to more

investment in U.S. businesses.

Monster Beverage Corp (MNST US, Caroline Levy)

As Caroline Levy highlights in Monster Beverage Corp. – Raise passion Brand PT to $73, MNST

stands to benefit from the corporate tax cuts.

MNST’s 2017E tax rate is 33.5% and derives an estimated 85% of profits from the US. As such,

Caroline estimates that ever 1ppt reduction in MNST’s effect rate adds ~$0.03 to EPS.

Colgate Palmolive (CL US, Caroline Levy)

Caroline highlights that CL’s 2017 tax rate was equal to 31%, well above the average for a global

company in Colgate-Palmolive – Upgrade to OP; PT of $81.

She estimates that for every 1ppt cut to CL’s tax rate, $0.05 is added to its EPS.

Fossil Group (FOSL US, Laurent Vasilescu)

Laurent highlights that the 21% US corporate tax rate will not help FOSL in Fossil Group – Great

Christmas Gifts.

The report notes that FOSL lost $72.3mm in the US last year and Laurent anticipates that the loss will

be more pronounced for FY17.


5 January 2018 17

Information Technology

US Semiconductors (Srini Pajjuri)

Srini sees limited impact from the proposed US corporate tax reform on US Semi companies in US

Semiconductors – Limited impact from Tax Reform.

He also notes that the median consensus sourced tax rate for his 27 Semi companies is about 11% in

FY17. Consensus estimates reflect a 20% or higher tax rate for only 3 companies (TXN, INTC and

KLAC) in FY18. Others will likely see a modest benefit as a lower domestic rate should result in a

lower overall tax rate.

Broadcom (AVGO US, Srini Pajjuri)

Srini estimates that AVGO’s tax rate won’t exceed 10% even without corporate tax reform (less than

5-6% impact on EPS) in Broadcom – Tax Surprise!

He also highlights that the company may incur additional taxes during repatriation.

Oracle (ORCL US, Sarah Hindlian)

Sarah highlights in Oracle – FQ2’18 Review – License Ahead, Cloud Softer that ORCL US could

potentially benefit from tax reform and repatriation. Reduced taxes on repatriation could make the

company’s ~$60bn in offshore cash accessible for use in future M&A and buyback.

Internet and Interactive Entertainment (Ben Schachter)

Ben notes that given the scale and international mix, tax changes can have outsized impacts on

Internet and Interactive Entertainment stock in Macquarie US TMT – Themes and stock picks for

2018.

He also notes that some changes can be positive such as the lower corporate rate and repatriation

penalty, while other potential changes, such as those being discussed in Europe, may be negative.


5 January 2018 18

Utilities

US utilities (Angie Storozynski)

Angie notes that many utilities seem unclear how to incorporate the impact of the corporate tax reform

into their 2018 earnings guidance in US utilities: 2018 EPS guidance and assumptions behind

corporate tax reform.

Further analysis on the impact of the tax reform is presented in the note as Angie hones in on

corporate debt and interest expense deductibility, rates for regulated utilities, and re-measurement of

deferred tax assets and liabilities.

FirstEnergy (FE US, Angie Storozynski)

Angie estimates that the reduction in the corporate tax rate from the current 35% to 21% would

increase FE’s parent level drag by ~$US0.11 per share in FirstEnergy – FERC/DOE nail-biter.

Southern Company (SO US, Angie Storozynski)

Angie notes that SO’s Georgia Power won’t be able to keep the benefit of a lower federal corporate

tax rate in 2018 and 2019 in Southern Company – Nuclear pressure now on both PE and EPS.

Angie also notes that while the reduction in the corporate tax rate would reduce the tax shield on SO’s

corporate debt, its earnings impact should be mitigated by improved after-tax results at Southern

Power and midstream operations, even if, over time, the latter would pass on the tax benefit to its

offtakers.


5 January 2018 19

Telecom

Pay TV & Telecom (Amy Yong)

Amy highlights that AT&T, Verizon, Comcast, T-Mobile, and Dish could all see a 16-27% boost to EPS

and a 8-23% boost to FCF/share in ‘18/’19 in Pay TV & Telecom – The Merry Matrix Reloaded as a

result of being full or soon-to-be full cash tax payers and beneficiaries of bonus depreciation.

Comcast (CMCSA US, Amy Yong)

Amy notes that regulation could put Comcast back on top in Comcast – A Little Better, A Little

Cheaper.

Moreover, Amy highlights that the corporate tax rate cut will likely boost EPS by ~26% in ‘18/’19 and

FCF by 20-22% based on sensitivity analysis. Amy believes the reform will also likely double the

benefits from bonus depreciation, increasing it from 50% to 100% for investments purchased from

Sept. ’17 - Dec. ’22.

SBA Communications (SBAC US, Amy Yong)

Amy highlights the upside risk to SBAC as a result of tax reform in SBA Communications – It’s Always

Sunny in Boca.

Domestically, SBAC stands to benefit as the health of AT&T, Verizon, and T-Mobile should improve on

the back of tax reform.

Financials

Goldman Sachs and M&T Bank (GS US and MTB US, David Konrad)

David highlights the lower corporate tax rate will benefit both GS and MTB in a recent presentation on

US Banks.

David notes that lower taxes stand to increase economic activity, driving better earnings leverage for

GS. The cut would also provide an outsized benefit for MTB.


5 January 2018 20

Appendix 1: Key elements and changes in the TCJA

Individuals. Analysis suggests in the initial years most (but not all) individuals will pay lower taxes as a

result of the plan, but the amounts vary considerably because of changes to deductions that have

different impacts on the specific circumstances of individuals.

Corporates. The headline corporate tax rate is set to fall from 35% to 21%, but alongside this there are

several changes to deductions. Analysis from the Penn Wharton Budget model suggests there will be

a sharp decline in the effective corporate tax rate (economy-wide) in 2018 from ~21% to ~9%,

representing a 13 percentage point decline. Our own bottom up estimate for the S&P 500 shows a

decline slightly less than this at ~8.8 percentage points.

International. The TCJA also includes a special one-time repatriation rate on profits earned overseas

and moves the United States to a territorial tax system.

Fig 13 Key elements to the Tax Cuts and Jobs Act

Source: Tax Policy Center, KPMG, Penn Wharton Budget Model, Macquarie Research, January 2018

Key elements 2017 law 2018 under Tax Cuts and Jobs act

Income tax brackets 7 brackets with top rate of 39.6% for >$470,070 7 brackets with top rate of 37% for >$500k, expiry in 2025

Estate tax Top rate of 40% applies to estates >$5.49mn Top rate of 40% applies to estates >$11.2mn, expiry in 2025

Individual mandate tax Required health insurance or pay a fine Repealed

State and local tax deduction Full write off of state income and local property taxes Capped at $10,000 expiry after 2025

Medical expense deduction Anything in excess of 10% of adjusted gross income Anything in excess of 7.5% of adjusted gross income

Mortage interest deduction Interest payments on mortage debt capped at $1.1mn

No change for current holders. Cap drops to $750k for new debt (expiring after

2025)

Alternative minimum tax exemption $54.3k and begins to phase out at $120.7k $70.3k and begins to phase out at $500k

Non-child dependent credit N/A $500 nonrefundable credit for non-child dependents

Child tax credit $1000/child for joint filers earning <$110k $2000/child for joint filers earning <$400k, expiry after 2025

Pass-through business deduction Individual income tax applied to pass-through income 20% deduction on pass-through income, with limits if income >$157.5k

Inflation rate measure Index tax provision to CPI for urban consumers Index tax provision to chained CPI

Standard deduction $6,350 individuals, $12,700 couples $12k individuals, $24k couples, expiry in 2025

Personal exemption $4,050 per person Eliminated, but returning in 2025

Corporate Tax Reform

Corporate tax rate 35% top rate 21% top rate

Coporate alternative minimum tax 20% Repealed

Net interest deduction No cap on net interest expense deductions Net interest expense deductions that exceed 30% of income are disallowed

Expensing of assets Expensing of depreciation of the asset over time Immediate 100% expensing in effect for 5 years

Net operating loss deductions Limits 20-year carryover to 90% with 2 year carryback Limits indefinite carryover to 80%, elimates carryback

Research & experimentation costs Costs can be expensed in current year or be deferred Costs must be capitalized and amortized over a 5-year period after 2021

Income attributable to domestic production activities 9% deduction from income for qualifying production Deduction is repealed

International Tax Reform

Territorial tax system Worldwide tax system - HQ in US must pay tax on all income Territorial tax system - tax paid on income generated in the US

Repatriation tax of assets 35% on all assets 8% on illiquid assets and 15.5% on liquid assets.

Tax Cuts and Jobs Act: Key elements

Individual Tax Reform


5 January 2018 21

Changes to the TCJA relative to preliminary legislation

Greater stimulus for individuals and less stimulus for corporates

The final bill as put forward by the House-Senate conference committee reveals tax law that provides

more stimulus to individuals than either the House or Senate bill individually. Indeed, while the House

and Senate had differing issues on certain key individual tax provisions, the conference committee

decided to provide the greater of the stimulus that was proposed by the two bills.

For one, the State and local tax deduction was not fully repealed, as per the Senate’s initial bill.

Instead, the final bill caps the State and local tax deduction at $10k, still providing some stimulus to

households, in line with the House’s initial bill.

Moreover, the conference committee also picked the greater of the stimulus when it came to: i) the

medical expense deduction was maintained with anything in excess of 7.5% of adjusted gross income

(Senate bill – repeal vs. House bill – maintain), ii) individual mandate tax was repealed (Senate bill –

maintain, House bill – repeal), iii) a $2000/child was allotted for the child tax credit (Senate bill -

$2000/child, House bill - $1600/child), iv) a $500 non-child dependent tax credit was included (Senate

bill - $500/non-child dependent, House bill - $300/non-child dependent), and v) top income tax rate

was listed at 37% (below both the Senate’s and House’s proposed 38.5% and 39.6% rates,

respectively)

Much of the above seems to have been funded by providing less stimulus to corporates (as compared

to what was initially proposed by the House/Senate bills). The conference committee generally chose

to opt for the lesser of the two stimuli proposed by the House/Senate. A key example of this is the

corporate tax rate; a rate of 21% was decided on, greater than both the House and Senate’s proposed

rate of 20%. Other examples include: i) the elimination of net operating loss carrybacks, while limiting

carryover to 80% (Senate bill – 80% carryover limit, House bill – 90% carryover limit), and ii) a

repatriation tax of 8% on illiquid assets and 15.5% on liquid assets (Senate bill – 7.49%/14.49%,

House bill – 7%/14%).


5 January 2018 22

Appendix 2: Estimation of economic impact from TCJA

Our calculation of the marginal year by year impact on economic growth flowing from the Tax Cuts

and Jobs Act is provided below (Fig 14).

Underpinning this work our estimates of the multiplier effects that flow through from changes to the

projected deficit in each year.

Our estimates of the multiplier to use comes from a Congressional Budget Office (CBO) working

paper.

For tax changes to individuals the CBO provides estimates ranging from 0.3 to 1.5 for tax cuts for

lower and middle income earners and a range of 0.1 to 0.6 for tax cuts for higher-income earners.

Lower and middle income earners receive ~42% of the tax benefit. We take the midpoint of the CBO’s

estimate for this group (0.9). Higher-income earners receive ~58% of the tax benefit flowing from the

Act. We estimate the multiplier for this group at 0.25. This is due to the skew of the tax benefit even

within higher income earners to the highest earners, where the marginal propensity to consume is

lower. Taking a weighted average of these estimates yields our estimate of a 0.47 multiplier for the tax

changes to individuals.

For corporate tax provisions the CBO finds a multiplier effect in the range of 0.0 to 0.4. We take the

midpoint of this range (0.2) in our calculation

Fig 14 Details underpinning our economic impact assessment


2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

A Tax changes for individuals -132 -179 -172 -173 -173 -170 -170 -144 -39 30

B Business related tax changes -160 -126 -106 -80 -41 -16 -6 11 -34 -50

C Tax changes for individuals 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47 0.47

D Business related tax changes 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20

E = -1*( A*C) Tax changes for individuals 62 84 81 81 81 80 80 67 18 -14

F = -1*(B*D) Business related tax changes 32 25 21 16 8 3 1 -2 7 10

G = E+F marginal impact relative to 2017 94 109 102 97 89 83 81 65 25 -4

H marginal impact vs. prior year 94 16 -8 -5 -8 -6 -2 -16 -40 -29

I nominal GDP 20,213 21,022 21,821 22,650 23,510 24,404 25,331 26,294 27,293 28,330

J = H/I

marginal impact vs prior year as share of

nominal GDP 0.5% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% -0.1% -0.1% -0.1%

Economic impact ($ billions)

Calendar Year impacts from Tax Cuts and Jobs Act

Deficit impact ($ billions)

Multipliers


5 January 2018 23

Appendix 3: Individual tax reform nuances

Some tax filers will pay higher taxes and much of the tax relief expires over time

While consumers will benefit in aggregate across the income distribution, there are stark differences at

the individual level. The Tax Policy Center estimates that in 2018, ~5% of tax filers will face higher

taxes as a result of the bill, while ~80% will face lower taxes.

This largely stems from the suspension and reform of some itemized deductions and income

exclusions. Particularly prominent amongst this is i) a $10,000 deduction limit to State and local

property taxes and sales taxes, ii) a limit to the deduction available for mortgage interest.

As many of the personal tax cuts expire over the ten year period covered, the impacts change by

2027. Analysis from the Tax Policy Center suggests during this year, only about 25% of tax units will

face lower taxes, while more than 50% of tax units will face higher taxes. Although it is likely that tax

law may be changed again in advance of that timeframe.

Fig 15 In 2018 about 80% of individual tax units will receive a tax cut, while only 5% are estimated to experience a tax increase

Source: Tax Policy Center, Macquarie Research, January 2018

Fig 16 By 2027 these numbers change considerably due to the expiry of certain measures

Source: Tax Policy Center, Macquarie Research, January 2018

Income percentile % of tax units Average tax cut % of tax units

Average tax

increase

Net % with a tax

cut

Average

deduction

(across all

taxpayers)

Lowest quintile 53.9% -$130 1.2% $810 52.7% -$60

Second quintile 86.8% -$480 4.6% $740 82.2% -$380

Middle quintile 91.3% -$1,090 7.3% $910 84.0% -$930

Fourth quintile 92.5% -$2,070 7.3% $1,360 85.2% -$1,810

80-90 92.3% -$3,370 7.6% $1,800 84.7% -$2,970

90-95 94.4% -$4,910 5.5% $1,890 88.9% -$4,550

95-99 97.3% -$13,890 2.7% $8,260 94.6% -$13,480

0.1 to 1st percentile 90.7% -$61,940 9.3% $93,910 81.4% -$5,140

top 0.1% 83.7% -$285,490 16.2% $387,610 67.5% -$193,380

All 80.4% -$2,140 4.8% $2,770 75.6% -$1,610

2018 federal tax changes from the Tax Cuts and Jobs Act

Receiving tax cut Tax increase Net impacts

Income percentile % of tax units Average tax cut % of tax units

Average tax

increase

Net % with a tax

cut

Average

deduction

(across all

taxpayers)

Lowest quintile 11.1% -$120 32.6% $90 -21.5% $30

Second quintile 23.3% -$280 57.7% $140 -34.4% $40

Middle quintile 24.4% -$520 69.7% $150 -45.3% $20

Fourth quintile 33.2% -$680 64.2% $190 -31.0% -$30

80-90 38.1% -$1,150 60.5% $300 -22.4% -$100

90-95 50.2% -$1,320 48.7% $450 1.5% -$190

95-99 58.0% -$3,510 41.5% $740 16.5% -$1,010

0.1 to 1st percentile 75.9% -$39,690 23.8% $1,250 52.1% -$20,660

top 0.1% 91.9% -$206,280 8.0% $3,200 83.9% -$148,260

All 25.2% -$1,540 53.4% $180 -28.2% -$160

Receiving tax cut Tax increase Net impacts

2027 federal tax changes from the Tax Cuts and Jobs Act


5 January 2018 24

Appendix 4: Corporate tax measure impacts on government revenues

Fig 17 JCT estimates of the item by item impact on government revenues

Source: Joint Committee on Taxation, Macquarie Research, January 2018

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Total (all

years)

Corporate - Domestic

Reduce corporate tax rate to 21%, repeal corporate AMT -108.1 -132.2 -137.1 -137.9 -139.6 -137.5 -142 -146 -150.9 -157.4 -1388.8

Net interest deduction capped at 30% of income 8.4 17.7 19.7 19.6 24.9 30.2 29.6 31.8 34.7 36.9 253.4

Changes to the treatment of investment -32.5 -36.5 -24.6 -14.2 -11.6 -4.9 3.3 8.4 12.5 13.7 -86.3

Modif ication to net operating loss deductions 6.4 10 11.1 15.9 25.2 34.1 36 30.2 20.8 11.4 201.1

Amortize research & experimental costs 0 0 0 0 24.2 32.9 26 18.9 11.4 6.3 119.7

Repeal of Domestic Production Deduction 4.3 8.9 9.3 9.6 9.9 10.3 10.7 11.1 11.6 12.2 98

Other reforms to certain business tax expenditures -7.8 -1.7 8.7 14.5 16.6 18.5 20.5 21.5 31.5 27.5 149.1

Subtotal - Corporate Domestic -129.3 -133.8 -112.9 -92.5 -50.4 -16.4 -15.9 -24.1 -28.4 -49.4 -653.8

Corporate - International

Deduction for dividends received by domestic corporations

from certain foreign corporations -17.8 -28.1 -20.1 -20.3 -20.8 -21 -22.1 -23.2 -24.3 -25.8 -223.6

Special one-time repatriation rate 78.6 49.6 16.5 15.6 15.7 27.2 47.5 64.4 33 -9.4 338.8

Base erosion and anti-abuse tax (BEAT) 0.8 4.3 13.3 16.1 17.1 16.8 15.9 16.5 21.6 27 149.6

Other international reforms 7.3 16.8 16.3 16.6 10.9 -0.5 -4.6 -9 -1.2 7.4 59.6

Subtotal - Corporate International 68.9 42.6 26 28 22.9 22.5 36.7 48.7 29.1 -0.8 324.4

Total -60.4 -91.2 -86.9 -64.5 -27.5 6.1 20.8 24.6 0.7 -50.2 -329.4

Total excluding special one time repatriation rate -139 -140.8 -103.4 -80.1 -43.2 -21.1 -26.7 -39.8 -32.3 -40.8 -668.2

Joint Committee on Taxation's estimates of the effect of the Tax Cuts and Jobs Act on Federal Tax Revenues (billions of $s)

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Appendix 5: Industry tables on effective corporate taxes and earnings (NAICS basis)

Fig 18 Effective corporate tax rates by NAICS industry under the Tax Cuts and Jobs Act


Industry (NAICS classification) 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Accommodation and food services 14.67 8.39 8.4 8.94 9.27 10.13 10.51 10.63 10.52 10.53 10.28 9.77 9.48 9.23

Admin and support and waste mgmt & remediation 24.84 13.77 14.05 14.95 15.62 19.07 19.66 19.86 19.51 19.43 19.09 18.28 17.87 17.53

Agriculture, forestry, fishing, and hunting 29.22 16.57 16.89 17.91 18.73 23.39 24.27 24.78 24.6 24.82 24.48 23.7 23.3 23

Arts, entertainment, and recreation 25.77 15.23 15.52 16.67 17.5 21.95 22.85 23.37 23.17 23.32 22.99 22.11 21.65 21.28

Construction 27.67 15.87 16.17 17.17 18.02 22.48 23.39 23.88 23.67 23.83 23.45 22.64 22.21 21.89

Educational services 28.18 16.27 16.54 17.49 18.24 22.65 23.39 23.77 23.54 23.7 23.38 22.63 22.25 21.96

Finance and insurance 25.38 14.17 14.45 15.26 16.07 19.94 20.65 20.94 20.58 20.57 20.08 19.53 19.21 19

Health care and social assistance 28.61 16.44 16.74 17.73 18.51 23.05 23.84 24.26 24.02 24.15 23.79 22.94 22.52 22.17

Information 21.54 12.64 12.86 13.74 14.43 18.67 19.19 19.41 19.05 18.99 18.67 17.97 17.59 17.29

Management of companies (holding companies) 15.86 8.66 8.75 9.09 9.37 10.14 10.11 9.84 9.6 9.69 9.43 9.5 9.47 9.45

Manufacturing 16.86 10.85 10.97 11.57 12.01 15.41 15.8 15.99 15.85 16.02 15.8 15.33 15.06 14.84

Mining 14.82 7.26 7.08 8.96 9.68 11.27 11.77 12.21 11.57 10.83 10.81 8.88 7.7 6.57

Other services 28.57 16.18 16.48 17.49 18.29 22.84 23.65 24.11 23.88 24.03 23.68 22.88 22.47 22.16

Professional, scientific, and technical services 24.46 14.17 14.49 15.4 16.16 21.22 21.92 22.22 21.96 22.06 21.73 21.03 20.68 20.41

Real estate and rental and leasing 25.49 10.58 10.72 14.76 16.22 21.4 22.77 23.56 23.48 23.71 23.37 22.43 21.91 21.5

Retail trade 26.71 15.45 15.71 16.6 17.29 21.3 22.01 22.42 22.27 22.51 22.23 21.54 21.18 20.9

Transportation and warehousing 27.88 15.83 16.13 17.14 17.89 22.19 23.04 23.6 23.47 23.72 23.42 22.65 22.24 21.94

Utilities 27.82 15.47 15.83 17.05 17.84 22.24 23.24 23.9 23.8 24.06 23.77 22.93 22.49 22.15

Wholesale trade 25.08 14.32 14.61 15.47 16.13 19.78 20.43 20.8 20.62 20.78 20.5 19.81 19.45 19.17

All industries 20.46 9.12 11.27 13.23 13.87 17.27 17.33 16.81 16 16.92 18.27 17.53 17.13 16.84

Effective corporate tax rates by industry under the Tax Cuts and Jobs Act

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Fig 19 Change in effective corporate tax rates by NAICS industry under the Tax Cuts and Jobs Act



Accommodation and food services 0 -6.28 -6.27 -5.73 -5.4 -4.54 -4.16 -4.04 -4.15 -4.14 -4.39 -4.9 -5.19 -5.44

Admin and support and waste mgmt & remediation 0 -11.07 -10.79 -9.89 -9.22 -5.77 -5.18 -4.98 -5.33 -5.41 -5.75 -6.56 -6.97 -7.31

Agriculture, forestry, fishing, and hunting 0 -12.65 -12.33 -11.31 -10.49 -5.83 -4.95 -4.44 -4.62 -4.4 -4.74 -5.52 -5.92 -6.22

Arts, entertainment, and recreation 0 -10.54 -10.25 -9.1 -8.27 -3.82 -2.92 -2.4 -2.6 -2.45 -2.78 -3.66 -4.12 -4.49

Construction 0 -11.8 -11.5 -10.5 -9.65 -5.19 -4.28 -3.79 -4 -3.84 -4.22 -5.03 -5.46 -5.78

Educational services 0 -11.91 -11.64 -10.69 -9.94 -5.53 -4.79 -4.41 -4.64 -4.48 -4.8 -5.55 -5.93 -6.22

Finance and insurance 0 -11.21 -10.93 -10.12 -9.31 -5.44 -4.73 -4.44 -4.8 -4.81 -5.3 -5.85 -6.17 -6.38

Health care and social assistance 0 -12.17 -11.87 -10.88 -10.1 -5.56 -4.77 -4.35 -4.59 -4.46 -4.82 -5.67 -6.09 -6.44

Information 0 -8.9 -8.68 -7.8 -7.11 -2.87 -2.35 -2.13 -2.49 -2.55 -2.87 -3.57 -3.95 -4.25

Management of companies (holding companies) 0 -7.2 -7.11 -6.77 -6.49 -5.72 -5.75 -6.02 -6.26 -6.17 -6.43 -6.36 -6.39 -6.41

Manufacturing 0 -6.01 -5.89 -5.29 -4.85 -1.45 -1.06 -0.87 -1.01 -0.84 -1.06 -1.53 -1.8 -2.02

Mining 0 -7.56 -7.74 -5.86 -5.14 -3.55 -3.05 -2.61 -3.25 -3.99 -4.01 -5.94 -7.12 -8.25

Other services 0 -12.39 -12.09 -11.08 -10.28 -5.73 -4.92 -4.46 -4.69 -4.54 -4.89 -5.69 -6.1 -6.41

Professional, scientific, and technical services 0 -10.29 -9.97 -9.06 -8.3 -3.24 -2.54 -2.24 -2.5 -2.4 -2.73 -3.43 -3.78 -4.05

Real estate and rental and leasing 0 -14.91 -14.77 -10.73 -9.27 -4.09 -2.72 -1.93 -2.01 -1.78 -2.12 -3.06 -3.58 -3.99

Retail trade 0 -11.26 -11 -10.11 -9.42 -5.41 -4.7 -4.29 -4.44 -4.2 -4.48 -5.17 -5.53 -5.81

Transportation and warehousing 0 -12.05 -11.75 -10.74 -9.99 -5.69 -4.84 -4.28 -4.41 -4.16 -4.46 -5.23 -5.64 -5.94

Utilities 0 -12.35 -11.99 -10.77 -9.98 -5.58 -4.58 -3.92 -4.02 -3.76 -4.05 -4.89 -5.33 -5.67

Wholesale trade 0 -10.76 -10.47 -9.61 -8.95 -5.3 -4.65 -4.28 -4.46 -4.3 -4.58 -5.27 -5.63 -5.91

All industries 0 -11.34 -9.19 -7.23 -6.59 -3.19 -3.13 -3.65 -4.46 -3.54 -2.19 -2.93 -3.33 -3.62

Percentage point change in tax rate from 2017

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Fig 20 After tax earnings impact (relative to 2017) resulting from the Tax Cuts and Jobs Act



Accommodation and food services 0 7.4% 7.3% 6.7% 6.3% 5.3% 4.9% 4.7% 4.9% 4.9% 5.1% 5.7% 6.1% 6.4%

Admin and support and waste mgmt & remediation 0 14.7% 14.4% 13.2% 12.3% 7.7% 6.9% 6.6% 7.1% 7.2% 7.7% 8.7% 9.3% 9.7%

Agriculture, forestry, fishing, and hunting 0 17.9% 17.4% 16.0% 14.8% 8.2% 7.0% 6.3% 6.5% 6.2% 6.7% 7.8% 8.4% 8.8%

Arts, entertainment, and recreation 0 14.2% 13.8% 12.3% 11.1% 5.1% 3.9% 3.2% 3.5% 3.3% 3.7% 4.9% 5.6% 6.0%

Construction 0 16.3% 15.9% 14.5% 13.3% 7.2% 5.9% 5.2% 5.5% 5.3% 5.8% 7.0% 7.5% 8.0%

Educational services 0 16.6% 16.2% 14.9% 13.8% 7.7% 6.7% 6.1% 6.5% 6.2% 6.7% 7.7% 8.3% 8.7%

Finance and insurance 0 15.0% 14.6% 13.6% 12.5% 7.3% 6.3% 6.0% 6.4% 6.4% 7.1% 7.8% 8.3% 8.5%

Health care and social assistance 0 17.0% 16.6% 15.2% 14.1% 7.8% 6.7% 6.1% 6.4% 6.2% 6.8% 7.9% 8.5% 9.0%

Information 0 11.3% 11.1% 9.9% 9.1% 3.7% 3.0% 2.7% 3.2% 3.3% 3.7% 4.6% 5.0% 5.4%

Management of companies (holding companies) 0 8.6% 8.5% 8.0% 7.7% 6.8% 6.8% 7.2% 7.4% 7.3% 7.6% 7.6% 7.6% 7.6%

Manufacturing 0 7.2% 7.1% 6.4% 5.8% 1.7% 1.3% 1.0% 1.2% 1.0% 1.3% 1.8% 2.2% 2.4%

Mining 0 8.9% 9.1% 6.9% 6.0% 4.2% 3.6% 3.1% 3.8% 4.7% 4.7% 7.0% 8.4% 9.7%

Other services 0 17.3% 16.9% 15.5% 14.4% 8.0% 6.9% 6.2% 6.6% 6.4% 6.8% 8.0% 8.5% 9.0%

Professional, scientific, and technical services 0 13.6% 13.2% 12.0% 11.0% 4.3% 3.4% 3.0% 3.3% 3.2% 3.6% 4.5% 5.0% 5.4%

Real estate and rental and leasing 0 20.0% 19.8% 14.4% 12.4% 5.5% 3.7% 2.6% 2.7% 2.4% 2.8% 4.1% 4.8% 5.4%

Retail trade 0 15.4% 15.0% 13.8% 12.9% 7.4% 6.4% 5.9% 6.1% 5.7% 6.1% 7.1% 7.5% 7.9%

Transportation and warehousing 0 16.7% 16.3% 14.9% 13.9% 7.9% 6.7% 5.9% 6.1% 5.8% 6.2% 7.3% 7.8% 8.2%

Utilities 0 17.1% 16.6% 14.9% 13.8% 7.7% 6.3% 5.4% 5.6% 5.2% 5.6% 6.8% 7.4% 7.9%

Wholesale trade 0 14.4% 14.0% 12.8% 11.9% 7.1% 6.2% 5.7% 6.0% 5.7% 6.1% 7.0% 7.5% 7.9%

All industries 14.3% 11.6% 9.1% 8.3% 4.0% 3.9% 4.6% 5.6% 4.5% 2.8% 3.7% 4.2% 4.6%

After-tax Earnings Impact


5 January 2018 28

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected

to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 30 September 2017

AU/NZ Asia RSA USA CA EUR

Outperform 50.38% 56.22% 40.70% 46.21% 63.85% 41.61% (for global coverage by Macquarie, 4.18% of stocks followed are investment banking clients)

Neutral 37.50% 28.16% 43.02% 47.52% 30.00% 39.51% (for global coverage by Macquarie, 2.68% of stocks followed are investment banking clients)

Underperform 12.12% 15.62% 16.28% 6.27% 6.15% 18.88% (for global coverage by Macquarie, 1.08% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group

This publication was disseminated on 05 January 2018 at 05:15 UTC.

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