Friday, 22nd of January 2021
“When the winds of change blow, some people build walls and others build windmills.”
– Chinese proverb
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President Trump is no more. The architect of America First departed the White House for the last time on Wednesday this week, flying straight to Mara Lago – his gaudy summer palace in Florida – for some much-needed R&R. Apparently, he left a ‘generous’ personal note on the Oval Office desk for now-President Biden, the contents of which Joe has decided to keep private. We doubt that it contains an apology for the Capitol Hill riot in early January. But after four bruising years of partisan battles in Washington, even Donald must be getting tired of Trump. He has promised that his presidential stage exit will not be the end of the MAGA movement, but golf will take priority for the time being. And until his blazing comeback what will the media do? We have all become so used to the vortex around the 45th president that even the most ardent Trump critic will be having withdrawal symptoms soon… Sad!
Biden has been quick to reverse many of Trump’s signature policies. Indeed, on Day 1 he signed a total of 17 executive orders to, among other things, re-join the Paris Climate Accord and freeze funding for the Mexico border wall. The two men are very different; and as money managers we need to understand what the change of regime means for markets. The blue wave that captured the Senate (just), kept the House (easily), and stole the Presidency (!) late last year means that all the levers of government are now in the hands of Democrats. Therefore, the Biden era could mean wholesale change across a range of policy verticals; this will create new winners and losers, opportunities, and risks.
Perhaps the biggest near-term consequence of Biden’s inauguration is the prospect of a huge additional fiscal stimulus being passed by Congress in the coming weeks (worth >$2tn at the last count). Markets love counter-cyclical government spending these days – the bigger the better. (Forget what happens when the bill comes due, that is for the next generation to worry about!) We therefore think that equities will be supported by any and all news of additional fiscal spending this quarter, and, assuming that the vaccine roll-out is not derailed by the emergence of a resistant variant of the coronavirus, the medium-term outlook for risk looks good. This is particularly the case for value, cyclical, and commodity-linked stocks, many of which still trade far below their pre-crisis peak. As regular readers of the newsletter will know, the rotation into beaten-up sectors has been underway for several months already. However, additional stimulus dollars are likely to turbocharge the move. To be sure, the rally that has taken place since Pfizer released its Phase III trial results in early November looks extended, and a correction is not unlikely over the next few weeks. However, there is no reason to sell up and sit Q1 out, particularly while the risk of missing the recovery is so massive. Hedges and exposures to precious metals should be sufficient to mitigate any interim volatility in our view.
Gazing further into the future, and particularly at the new Administration’s legislative agenda, however, suggests a mixed outlook for equities. On the positive side, Biden is likely to calm tensions with China, Iran, Venezuela, and America’s European allies, bringing more consistency and diplomacy to bear on international relations. Biden is not a free trade fundamentalist in the manner of an early 2000s business lobby Republican. But he is also not a knee-jerk protectionist. And markets are likely to benefit from this more balanced approach. On the negative side, however, Biden is less economically laisse-faire. Ahead of the November election, he promised what Cornerstone Research has calculated were close to $3tn in additional taxes to be raised over the next 10 years. This would do a lot more than reverse the Trump tax cuts of 2017, which were worth <$1tn according to JP Morgan. If realised in full, Biden’s plan would have a sizable impact on corporate EPS; and with valuations already very rich, any hit to long-term earnings could precipitate a significant market sell-off. In all fairness, the President’s pick for Treasury Secretary, Janet Yellen, seems to be much less committed to tax hikes than her boss, and pre-election pledges were probably more about grabbing headlines than dollars. However, if only half of his program is enacted as law (the other side of which is an $8tn increase in spending on education, entitlements, infrastructure, and healthcare over 10 years) this would lead to a fundamental change in the size of the state as a fraction of the US economy. At the same time, Biden is intent on reversing the de-regulatory agenda that Trump pushed in office. This will raise the compliance burden for US companies, particular in the energy sector where his progressive environmental views are likely to make waves after 4 years of the Donald. Wall Street could be a lot less happy at the end of the Biden years than at the start.
That said, some specific sectors and themes will be big beneficiaries of Biden’s agenda. For example, everything to do with sustainable tech and renewable energy will boom given his determination to bring the US into alignment with Europe on this policy front; and missing this trade would be a big mistake in our view. Moreover, while Big Tech companies have been slammed by progressive Democrats who are threatening anti-trust legislation to curb their influence, we doubt that the sector has much to fear from Biden. It is the most important industry that America has – both in economic and strategic terms. The China-US struggle for global dominance has only just begun, and no right-minded President would seek to cripple the country’s competitive advantage in this area. As such, we are quite comfortable holding onto our technology themes regardless of what AOC and others say on the Hill. The trend is structural, not cyclical, whoever is holding office.
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