As Joe Biden’s presidency passes the 100-day mark, fund managers are considering what impact his inaugural period in office will have on financial markets.
A mammoth USD1.9 trillion Covid-19 relief package has already passed through Congress, and further stimulus is expected amid plans to overhaul US infrastructure and update the energy system in line with the administration’s climate goals.
It is clear that Biden’s administration is taking a very different direction compared to the Trump government it replaced in January.
Biden has called for a series of “once-in-a-generation investments in our nation’s future”, and planned spending so far amounts to USD6 trillion.
This includes the American Families Plan, announced to Congress on Wednesday, which sets out major spending and tax cuts for workers, families and children planned for the next 10 years.
Investment managers have given their views on the market impact of the increased Covid fiscal stimulus and infrastructure spend, as well as the trends they see arising over the coming years as a result of the new direction of the US.
Matt Benkendorf, CIO of Vontobel Quality Growth, believes that markets could see more volatility later in the year, as inflationary spending plans take their course.
“Multiple rounds of Covid-relief fiscal stimulus, combined with President Biden’s recently proposed USD2.25 trillion in infrastructure projects, have started to trigger a sense of spending fatigue. It’s only natural to question the implications these programmes could have on inflation and interest rates. Parts of the market, such as renewables and green industries, are already factoring in increased spending on infrastructure,” says Benkendorf.
He continues: “However, there is likely to be intense political debate about whether the economy needs more investment, which could bring further volatility this year. While a narrow focus on sectors and stocks has delivered outsized returns for some investors in recent quarters, investors need balance to consistently achieve success over the long-term.”
Investment opportunities remain “broad” through a Quality Growth lens, in companies that performed well throughout the Covid-19 pandemic and those that are “normalising”, according to Benkendorf.
Andrew Pease, global head of investment strategy at Russell Investments, says Biden’s fiscal stimulus puts the spotlight on equities for the time being.
Since Biden’s inauguration in January, the S&P 500 has risen by around 10 per cent, buoyed also by the ongoing vaccination roll-out.
“A significant political shift under President Biden is towards higher taxes on corporations and the wealthy. Fiscal stimulus and the Covid recovery mean the cycle favours equities for the next year or so,” says Pease.
“Later in the decade, however, portfolio returns are likely to be under pressure from higher inflation and rising interest rates, and from further tax hikes to deal with spiralling public debt servicing costs.”
Biden’s recent stimulus proposals are expected to be funded by tax hikes on corporations and high-income Americans.
Pease sees investment opportunities coming from a greater focus on projects that pass ESG filters. “Private markets are also likely to gain favour as returns on listed asset classes come under pressure and investors seek out illiquidity premiums,” he comments.
David Riley, chief investment strategist at BlueBay Asset Management, says the first 100 days of the Biden presidency have been “very eventful for investors”.
“A bigger than expected USD1.9 trillion Covid-related fiscal package boosted market expectations for US and global growth, raised inflation fears and drove Treasury bond yields and US dollar higher. The administration has also unveiled a USD2.5 trillion ‘green’ themed infrastructure plan partially funded, to the dismay of some, by tax hikes on companies and high-income households,” says Riley.
Riley believes that Biden’s climate change policy should be a major focus for investors. “It is the 180-degree shift on climate change that could have the most significant long-term implications for investors. US is now committed to cutting carbon emissions to half their 2005 level by the end of the decade that will involve huge investment and new clean technologies.”
Joshua Kendall, head of responsible investment and stewardship at Insight Investment, warns that it may be too soon to tell what the environmental impact will be from Biden’s presidency.
“As things stand, the climate impact of the new Biden administration remains unclear. There have been a number of positive developments, but far more detail needs to be conveyed regarding the proposed plans to understand exactly how the sustainable transition trajectory will evolve,” says Kendall.
“One point that we do expect to hear further detail from the administration on is how the infrastructure plan will support various environmental targets such as the US aiming to achieve net-zero emissions by 2050. Of course, it goes without saying that investment in bridges and broadband, whilst very important objectives, will also likely have negative carbon impacts. For example, updating or improving roads will therefore encourage greater use of cars.”
Kendall says positive investment opportunities are opening up in electric vehicle charging, but notes that more policy-led initiatives that directly set utility emission rules and encourage renewable generation will be needed “if we really want to shift the dial”.
“As yet, we have not seen any detail in this regard so the proposed climate plan will be closely scrutinised, and we would expect that to be far less benign than the infrastructure rules,” says Kendall.
Tatjana Puhan, managing director and deputy CIO, TOBAM, also believes that the ambitious reduction plans for CO2 emissions will have a positive impact on companies that are related to electric vehicles and associated sectors, and should be “negative for companies that will be punished by new laws”.
“The question, however, is how much of an investment strategy it would make sense to build around it,” says Puhan.
Puhan instead looks toward longer-term trends, saying that higher inflation and the need to keep interest rates low “could become a real issue” down the line.
Yields on US 10-year Treasuries spiked above 1.7 per cent in March after investors’ fears of higher inflation drove a sell-off in the bond market.
Puhan continues: “Importantly, the vaccination programme seems to advance smoothly, which will determine what happens in the next coming months with the US economy, helping Americans to re-normalise life and this will make the impact of the fiscal stimulus packages much more effective. If the US continues to get more quickly out of the misery, this will also mean that the USD remains strong.”
Chris Smith, portfolio manager of the Artisan US Focus Fund at Artisan Partners considers the post-pandemic business environment that will be revealed by a successful vaccination roll-out.
Smith says that the pace of the vaccine rollout in the US has already “exceeded all but the most ambitious projections”, far surpassing President Biden’s initial goal of 100 million doses in 100 days. By the end of April, the US had administered 230 million doses of coronavirus vaccinations.
“We are consequently seeing emerging signs that life is returning to some semblance of normalcy – although some behavioural changes, such as de-urbanisation and the increased adoption of e-commerce, may endure in a post-Covid society. As we build our company forecasts for 2021 and beyond, we are aware there are no guarantees that businesses that thrived in 2019 or 2020 will continue prospering post pandemic,” says Smith.
Trevor Greetham, head of multi asset at Royal London Asset Management, says investors should be mindful of the impact of future tax raises.
“The Republican presidents of the last 40 years, Trump included, have all overseen a significant widening in America’s budget deficit, while the Democrats have left public finances on a firmer footing. Despite punchy spending pledges, Biden may extend this pattern as the post-Covid recovery triggers a rapid snap back in tax revenues,” says Greetham.
“US fiscal and monetary policy are both extremely loose and there’s no chance of tightening while the pandemic continues to pose a threat. We wonder whether this will end up being a short and fiery business cycle, like those of the 1970s: good for stocks, property and commodities in the near term but with a super-charged recovery ending a couple of years out with inflation, rising rates and a painful economic adjustment. Mind your eye.”