Analysis: Wall Street cheers U.S. election removing major tax-hike threat

By Svea Herbst-Bayliss and Chibuike Oguh

(Reuters) - Wall Street breathed a sigh of relief on Wednesday, as the latest U.S. election tallies pointed to a divided government that made the prospect of tax hikes advocated by Democratic presidential candidate Joe Biden unlikely. [.N]

Biden has proposed raising the capital gains tax rate from 20% to 39.6% for those making over $1 million, which would represent a big blow to the asset management industry. Other tax hikes he has put forward include increasing the statutory corporate income tax rate from 21% to 28%.

Biden was leading in key Midwestern states in the race for the White House as votes were being counted on Wednesday afternoon, but President Donald Trump's Republican Party was poised to keep control of the Senate even as Democrats retained their majority in the House of the Representatives. [nL1N2HQ0VQ] Tax changes would need to be voted through the House and the Senate and be approved by the White House to become law.

Even if Biden were to prevail over Trump, the composition of the legislature would make it challenging for him to push ahead with his tax changes. Pollsters' earlier predictions that Democrats would win control of the White House and Congress had cast a cloud over Wall Street, fund managers said.

"The markets are taking comfort from the fact that there likely won't be a significant tax increase any time soon," said Troy Gayeski, co-chief investment officer of hedge fund investment firm SkyBridge Capital.

Shares of private equity firms, whose performance fees would have sustained a big tax hit were Biden to have his way, soared on the early voting results. Blackstone Group Inc (NYSE: BX), KKR & Co Inc (NYSE: KKR) and Carlyle Group Inc (NASDAQ: CG) shares jumped 7.1%, 7.4% and 4.2%, respectively. Other fund managers, including hedge funds and venture capital firms, also expressed relief.

"Regardless of the outcome for president, fears of a blue wave and the potential for a sweeping overhaul for private equity regulation are likely stemmed with the Republican Party likely maintaining control of the Senate," Jefferies analysts wrote in a note on Wednesday.

Shares of large mutual fund managers such as BlackRock Inc (NYSE: BLK) and T. Rowe Price Group Inc (NASDAQ: TROW), whose business would also have a taken a hit from a capital gains tax hike, also rallied.

"Even if Biden wins the presidency, it will be much more difficult for him to pass his proposed tax increases and the market clearly likes that," said Bolvin Wealth Management Group President Gina Bolvin. "Markets like gridlock because a divided government takes out extremes."

Multimedia U.S. election coverage: https://www.reuters.com/world/us-election2020

IMPACT ON DEALMAKING

A capital gains tax hike would have also weighed on Wall Street's business of advising on mergers and acquisitions. Investment bankers said a pickup in corporate divestments by individuals, families and private equity firms in the run-up to the election was fueled by fears of Biden implementing his tax plan. Bankers were worried about deal activity slowing down over the next few years if Biden's tax changes were enacted. [nL8N2H55OY]

Even though taxes are only one consideration for corporate sellers, the prospect of divided government has now removed a significant overhang for dealmakers, advisers to companies said.

"If you had a family that was looking to sell a business, they may breathe a sigh of relief now on potential tax changes but they need to be aware that things may change again in two years," said Daniel Wolf, a partner at law firm Kirkland & Ellis LLP.

Banks were big beneficiaries of tax cuts under Trump, making a reversal seem ominous. Biden's tax plan would have reduced big banks' earnings per share by a median of 7.4% based on 2021 estimates, according to Morgan Stanley analyst Betsy Graseck. Bank stocks were slightly up on Wednesday afternoon. [nL1N2H60SQ]

"It is now unlikely that we're going to get a hike in the corporate tax rate," said Fred Cannon, director of research at Keefe, Bruyette & Woods.

There was more good news for Wall Street in several key congressional races. Many banks' favorite lawmakers declared victory overnight, leaving the composition of banking committees in the House of Representatives and Senate largely intact. [nL1N2HQ2L5]

(Reporting by Svea Herbst-Bayliss in Boston and Chibuike Oguh in New York; Additional reporting by David Henry and Jessica DiNapoli in New York; Editing by Greg Roumeliotis and Matthew Lewis)

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