Biden's tax plan could turn winners into losers -Advisor

RegentAtlantic's Investments Co-Head Andy Kaprin tells Reuters' Fred Katayama how the markets may react if President Joe Biden were to nearly double the capital gains tax rate on the wealthy.

Video Transcript

FRED KATAYAMA: Wall Street's major indexes dropping more than 1% Thursday afternoon on news on a report of a possible tax hike. Well, our next guest says this economic recovery is different. Let's get more on that from Andy Kaprin.

He is co-head of investments at RegentAtlantic. Good afternoon. Welcome back, Andy.

So there's a report out there saying that President Biden could well propose, almost doubling, the capital gains tax rate on wealthy individuals to nearly 40%. That's pressuring stocks. Could this possibly derail the rally? What do you see as possible long term implications?

ANDY KAPRIN: So I think the market's reaction to that headline number is normal. It's normal to look at a doubling of the capital gains tax rate and say that that changes people's opinions about stocks. What I think is important to keep in mind is this is only the first volley, the first shot across the bow in what is likely to be a long negotiation among different stakeholders in Washington. But here's what we do know.

We do know that capital gains taxes, taxes on investments are likely to rise over the course of the next few years. They've been historically low. What can investors do about that? What should they think about as they're doing it?

This-- it might make this year a very good year to recognize capital gains. And it might make certain investments winners versus losers. A lot of people have substantial capital gains in stocks like Apple, Microsoft, Amazon, things that they bought, say, five years ago that have quadrupled, quintupled, gone up a lot. This gives them an opportunity to accelerate that capital gain. So that they pay less taxes now as opposed to more taxes in the future and reposition their portfolios. It might actually make relative winners and losers. The relative losers are actually likely to be the relative winners of yesteryear.

FRED KATAYAMA: All right, well, today we got jobless claims, weekly jobless claims. They fell to a new one year low. Now you were saying that this economic recovery is different from those in the past. So how should investors rearrange their portfolios to take advantage of this particular economic recovery that you say is different?

ANDY KAPRIN: That's right. So I think looking at recent economic recoveries, take the recovery from the dotcom bust, the recovery from the housing bust. And what you see is a pattern of very slow, very anemic growth. It takes a long time for the labor market to get back to normal, a long time for animal spirits to reemerge. That's not going to be the experience of this recovery.

It already is not the experience of this recovery. We're likely to get back to full employment by the end of this year, a far cry from how long it took to get back to normal from the previous recession. Animal spirits are already running hot. Inflationary pressures are already starting to build.

And here's what it means for investors. Here's how you position your portfolio to benefit from this. You want to be more aggressive in your portfolio positioning and reach for investments that benefit from rising inflation, rising economic activity that traditionally run tight profit margins, but can make hay when the economic environment is right. And those are two categories. And I'll actually add a third one, too.

Two categories that really benefit from this are small cap stocks, small cap stocks. Riskier companies that run on tighter profit margins that have higher levels of debt really benefit from this environment because it takes their very low profit margins and expands them quickly. The value segment of the stock market benefits from this, too. Because what is value?

If I categorize it as a certain set of industries? Its banks. Its energy and materials. It's industry, things that benefit from it getting back to normal or a robust rapid growth in the economy.

The third one I'll add is a little bit not traditionally thought of as a recovering investment, real estate. Real estate is a getting back to normal investment. So when you invest in publicly traded real estate investment trusts, what are you getting? You're getting retail. You're getting office buildings.

You're getting e-commerce warehouses, which are more of a secular growth play. But real estate in large will benefit from a getting back to normal and a fast recovery back.

FRED KATAYAMA: And Andy among your stock picks as one of the big stocks is FedEx. Now that stock is more than doubled over the last 12 months. A lot of investors saw it as a stay-at-home play because of all the goods that people ordered at home. Do you see this shifting over to inflation trade play the same way that Disney has been able to do so?

ANDY KAPRIN: So I find FedEx so exciting, actually similar to Disney in that it can straddle both sides of the line between working from home, shopping from home, entertainment from home, and getting back to normal. FedEx is likely to consolidate and keep its gains from an increase in shop from home. People have gotten more comfortable with the idea of clicking and ordering and getting it to their doorstep. But here's where FedEx has earned historically a lot of its profits overnight delivery for businesses.

Those little envelopes full of paper that need to get signed and need to get back right away, they're likely to get sent in much higher volumes over the course of 2021, relative to 2020 because people won't be working remote anymore. And that's going to allow them to fire on all cylinders.

FRED KATAYAMA: And valuations, right now it's trading at 24 times earnings. Is that on the high end? I mean, is there more-- how much more room North is there for the stock?

ANDY KAPRIN: So I think that in a vacuum that is not a cheap valuation. You have to recognize that they spent the bulk of 2020 in a high cost environment, trying to fight a crisis, trying to deliver for their customers. What they can do is they consolidate the gains is bring their cost structure back down and experience higher profitability this year.

FRED KATAYAMA: OK, thank you, Andy, for your thoughts. Well, thanks to Andy Capron of RegionAtlantic. I'm Fred Katayama in New York. This is Reuters.