The Last 7 days Has Underpinned the 2021 Cyclical Upside.

market analysis

The last 7 days has underpinned the 2021 cyclical upside.

By

Paul Ashworth, Managing Partner


Posted 11 January 21

The last 7 days has delivered a Democrat controlled Congress. In turn, fiscal stimulus supporting pro-cyclical growth will likely be more assured through 2021.

Interview with ausbiz, 11 January 2020

In an interview with ausbiz today, our Managing Partner, Paul Ashworth, commented on the rapid shift over the last 7 days in the US political and economic landscape occasioned by the Democrats taking control of the Senate (with the House of Representatives already secured).

The Democratic victory in both Georgia Senate seats now sees a clearer path for the Biden Administration to secure its outwardly stimulatory economic policies. It is not all plain sailing given procedural filibuster rules in the Senate which require a special majority for legislation to be considered. This can be circumvented once a year in significant budget legislation which would be likely in June/July. Following the Capitol Riot last week, there may also be greater scope for bipartisanship legislation, particularly with moderate Republicans (Romney, Collins, Murkowski).

Up and until a week ago, the transition process from Trump to Biden and Biden's ability to have his cabinet appointments confirmed looked to both have significant difficulties. With the Georgia Senate wins and the 'wash-up' from the Capitol Riot, the Biden Administration can now fairly seamlessly get its cabinet and key administration appointments confirmed by the Democratic controlled Senate. This will allow the process of effective government to occur more rapidly than would have likely been the case with a Republican controlled Senate.

These factors are pro-growth, with upside implications for growth and hence cyclical firms and a steepening long bond yield curve. So only a week into 2021, one of our major identified downside risks for market risk assets has shifted to the upside. Sustained fiscal stimulus looks decidedly more assured (though the Biden tax increases for households are far from assured).

Watch the recorded session here.
— A key point summary can be read below.

Here are the key summary points from today's interview:

Spending:

  • Social spending is likely to be fast-tracked in the form of higher unemployment benefits and an increase in the $600 payment per taxpayer and dependent
  • Green investment program up to $2 trillion to underpin US re-engagement in global climate change initiatives
  • Traditional infrastructure spending to rebuild America's ageing infrastructure
  • Biden spending policies would see an additional $5.3 trillion in US Government spending from 2021 to 2030.

Taxation:

  • A proposal to increase the corporate tax rate from 21% to 28% - once allowances are taken into account, the effective tax rate impact is more muted for industrials but somewhat adverse for technology companies
  • Various increases in personal income taxes for incomes over $400,000 and capital gains where incomes exceed $1m. We see this as problematic legislation and will require a degree of bipartisanship to succeed
  • Biden tax policies would raise an additional $3.37 trillion in tax over 2021 to 2030.

Investment Implications:

  • We retain our positive view on market risk assets through 2021, particularly 'smart industrials' synced to a cyclical growth uplift
  • Equity valuations are high but probably not expensive as the risk premia equity investors now require is probably lower combined with policy directed lower interest rates
  • Economic growth underpinned by government stimulus (and central bank acquiescence of burgeoning government debt)
  • Long bond yields may surprise on the upside, bounding 2% to 4% depending on the stimulatory impact of government stimulus - if long bonds settled at the upper end at 4%, then this would be negative for equities and inflation expectations
  • So whilst the journey over 2021 is we view quite positive for market risk assets (modest inflation, no wages pressure, solid economic growth trajectory), the outlook from 2022 and beyond, may significantly challenge inflation expectations and reverse bond trends of the last 30 years which in turn have supported both risk assets and long duration assets.

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