We’ve seen a significant amount of activity out of the White House from Day 1 of President Biden’s tenure, with new initiatives along the lines of his campaign proposals as well as those demanded by the economic and healthcare fallout of the COVID pandemic. Here we discuss what we have seen so far, and how it might shape up for investors.
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Since Inauguration Day on 20th January, markets have seen a near 10% rise in equities and strong investment inflows. Much of this cannot be disaggregated from the hopes of economic recovery and reopening but it is a good start and vote of confidence from investors.
In a recent webinar, Elliot Hentov and I discussed what we could learn from the first few months of the presidency and what larger themes are emerging. Amongst the things we believe that investors should consider are:
1. Implications of climate strategy
As expected, President Biden has started work on his pledges to support climate action. Amongst Elliot’s interesting insights are how proposals from the White House, and rapid action through meetings with leaders of other countries, has the power to act as a stealth trade policy, with implications for international relations.
Any greater cooperation and environmental regulation is to be welcomed, especially if it results in a more stable geo-political background for investors. On a practical level, moves towards carbon neutrality across economies will continue to drive ESG investment and possibly lead to higher green premiums in certain areas. We see the steady replacement of core equity investments by ESG equivalents continuing. An easy way to access the key S&P 500 index whilst excluding controversial activities and companies not compliant with United Nations Global Compact principles behaviour, but retaining a tight tracking error to the index.
2. Building Back America Better
We have already seen one significant fiscal spending package enacted under Biden when US households received relief cheques, which have helped buoy consumer spending. Next up is the proposed $1.9 trillion American Jobs plan, which may be merged with the more social policy of the American Families Plan.
Whilst the level of traditional infrastructure projects, such as road and bridge building may fall short of some expectations, there will be significant construction activity and contracts to be awarded to US corporates. The sector that we see benefiting most from the American Jobs Plan is US Industrials. The manufacturers, engineers and contractors of the sector have the essential expertise and skills necessary for projects such as upgrade and electrification of the transportation infrastructure, delivering new utilities pipelines, building a more resilient electric transmission system and upgrading commercial and residential properties.
3. Paying for it
We are unlikely to get the answer on how Biden’s plans will be funded in the short term, which could unnerve investors about what companies could face higher tax demands in future. The impact on a sector basis depends on what parts of tax proposals are enacted. Amongst the ideas which have received much attention are a proposed rise in the corporate tax rate from the relatively low level of 24% and “GILTI” aimed at discouraging offshoring by increasing the global minimum tax for US multinational corporations. Such tax changes would be particularly relevant for IT companies (sitting within the Technology or Communication sectors) whose assets are largely intangible which has enabled them previously to take advantage of low tax regimes offered around the world. Amongst the sectors that could face less upheaval is Real Estate, because of its large make up of Real Estate Investment Trusts.
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EXP 30 April 2022