It is almost one month since the new Biden administration took office. What were his first steps? How did markets react?
After the political turmoil in Washington DC in early January, the scaled down inauguration proceeded under unprecedented security measures. The new administration is also breaking new ground in many other ways – we have the oldest President in American history, we have the first female Vice President, and the first woman as the U.S. Secretary of the Treasury. All of this occurring against the backdrop of the first global pandemic in over a century.
President Joe Biden inherited the pandemic and ensuing economic decline. Without question, the Covid-19 pandemic is perhaps the most tremendous public health challenge in the post-war era, given its capacity to upend global economic activity. That said, this economic shock can be characterized as "event-driven", whereby the eventual recovery should be relatively quick, once the pandemic fades and lockdown measures prove to be redundant. As such, to lessen long-term scarring effects (especially in the labor market), the Biden administration prefers to "act big" when it comes to enacting fiscal stimulus
As it stands today, the Democrats have a razor thin majority in the legislature. This should allow President Joe Biden to pass fiscal stimulus measures with the sole support of his own party. As of the time of writing, both the upper and lower chamber passed a budget measure enabling President Biden's proposed Covid-19 relief package of USD 1.9 trillion.
However, the U.S. federal government is also running record fiscal deficits, almost at levels last seen during World War II. Sizeable deficits are not without consequences, and it can be argued that weaker trend of the USD reflects worsening fiscal fundamentals. However, with the loose fiscal stance, coupled with our expectations of successful vaccine rollout, we argue that the reflationary backdrop should allow the U.S economy to recover at a pace much faster than what was seen in 2008.
Some market commentators suggest that the new Administration may take an "easy" approach to China. We are somewhat skeptical regarding this view – a tough stance vis-à-vis China garners support across the US political spectrum, and therefore we do not see a change in course any time soon.
Having said that, we think the Biden Administration may take on a different style and tone towards China – importantly, a return to multilateralism, seeking support from traditional allies to form various international arrangements, in an attempt to strengthen its influence, may all be on the cards.
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Over the coming year, political effort should remain focused on the containment of Covid-19 pandemic, while foreign policy may take a back seat, in our view. Ultimately, it is more pressing for the global economy to normalize as soon as possible, and for our daily lives to resume back to the "old normal".
We see this process starting in the second half of 2021, as a critical mass of the world's population may be vaccinated by that time. Therefore, our current investment strategy advocates a more cyclical and higher beta positioning, favoring equities in Europe, Asia and Japan. These markets stand to gain the most upside as pent-up demand from consumers and businesses is released, once the pandemic fades into the background, in our view.
Header visual: © Keystone/AP Photo/Carolyn Kaster.