Windfall taxes a possibility for European companies, says Ignis’ Chris Bowie

Chris Bowie, head of credit at Ignis Asset Management, says that European companies are likely to be hit by windfall taxes as a way to generate cash and cope with debt levels.

Bowie, who manages the £246m Ignis Corporate Bond fund, says there are a number of companies generating strong cashflow at the moment who could be affected by windfall tax in the near future, especially in Europe.

“Consumers and government do not have cash but companies do – there are a number of market leaders that are generating strong cashflow; for example Telefonica and Santander in Spain and Telecom Italia in Italy.”

“The domestic sovereigns in these countries, or elsewhere, have the potential to introduce a windfall tax in a bid to generate cash.”

“The sectors likely to be affected are the oil, gas and telecoms sectors. Windfall tax will be harder to cull in the banking sector as they would have to stop lending and cut even more jobs, therefore I do not see the government pushing the banks hard. This is not to say the government will not try to get money out of the banks, they will just do it in a different way.”

“This scenario is not pure conjecture; bear in mind that this has happened in the recent past. The [UK] coalition government applied a windfall tax to the oil and gas sector in its second budget in March this year. If this can happen in the UK then it could happen across the globe and this should be a major concern for equity investors.”

“While such a tax would have a negative impact on corporate earnings, it is important to note that equity dividend payments [in the UK] are made after tax, while bond coupons are paid before tax. This means should a windfall tax be imposed, corporate bond investors would see their income protected while equity investors would suffer from slashed dividends.”

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