With U.S. President Biden inaugurated, investors’ attention has already shifted to his expansive policy priorities. Asian investors are eager to see if some of the more stringent measures on trade and financial investment against China, implemented by the Trump administration, will be rolled back or eased.
They will have to be patient. Facing many urgent domestic emergencies, the early days of Biden’s administration will be consumed by taming COVID-19 and revamping the U.S. pandemic response. Any early actions on foreign policy are likely to focus on reconnecting the U.S. to global institutions, traditional allies and agreements. This is illustrated by the two executive orders to rejoin the Paris Agreement and the World Health Organization on his first day in office.
The president’s singular priority will be tackling the pandemic and addressing the economic damage it has wrought. Out of the 30 executive orders and directives he issued in the first three days as president, 14 were COVID-19-related and four on supporting the economy.
The U.S. is seeing a daily average of 250,000 new infections and over 3,000 deaths. Apart from the pressure on the health care system, this is also damaging the economy once again. President Biden envisions a much more robust federal role in everything from testing to vaccine delivery. One of his key objectives is to provide the U.S. with 100 million vaccine doses by the 100th day of his administration. So far, the U.S. is well on track to reach this target, having already administered the first dose to 20 million people. The daily vaccination number has risen to over one million and additional vaccine approvals may be on the horizon.
On the economy, President Biden proposed a USD 1.9trillion fiscal package, which is around 9% of gross domestic product. This “American Rescue Plan” would provide an additional USD 1,400 payment to Americans below a specific income level, expand unemployment benefits, set minimum wage at USD 15 per hour, and allocate billions of spending to schools, hospitals, state and local governments.
With the Democrats’ victory in the Georgia runoff elections, and a majority in both the House and Senate, pieces of this proposal could be enacted. Some areas that will have an incidental impact on the federal budget, such as the minimum wage adjustment, would require 60 out of 100 votes in the Senate, including the support of 10 Republican senators. This will also be the first test of whether President Biden can facilitate greater bipartisan collaboration.
Even if this proposal cannot be fully implemented, these plans should help to reassure investors that the government is in a stronger position to support the economy. The Federal Reserve should also be in a better position to prevent government borrowing costs spiking with its asset purchase program.
The U.S.-China relationship remains a tense focal point, but patience is needed. The Biden administration is not expected to unwind tariffs, tech export restrictions or limitations on investment in selected Chinese companies from the previous administration in the near term.
One of the few points of agreement in Washington is that China is a long-term strategic competitor on various fronts. However, rather than wading into the China relationship immediately, Biden’s short-term attention will be on reconnecting the U.S. with its allies and international organizations.
On a more positive note, the new government should be less inclined to introduce new tariffs and other trade measures to pressure China in the near term. This should help to reduce uncertainty and bring down the level of market anxiety.
EXHIBIT 1: VACCINE ROLLOUT
Source: Our World in Data, J.P. Morgan Asset Management. Daily doses are counted as single doses and may not equal the total number of people vaccinated.
Data reflect most recently available as of 23/01/21.
Investment implications
We believe investors have already reflected several positive factors from the new U.S. administration. This includes a more coordinated and science-based approach on battling the pandemic, stronger congressional support on fiscal spending to support the economy and reduced tail-risks on trade measures against China that could further dampen corporate sentiment and recovery momentum. This should continue to support risk assets, such as equities and U.S. high yield corporate credits.
We do expect headline inflation to move higher in the months ahead due to the low base effect from last year, but we do not think this would be enough to push major central banks to rethink their current stance of ultra loose monetary policy. Nonetheless, a more optimistic growth outlook would push U.S. Treasury (UST) yields higher, as we experienced in the first two weeks of 2021. This could imply a negative total return from UST, especially at the long end of the curve. This duration risk could also undermine investment grade corporate credit, given the relatively modest yield and limited room for credit spreads to tighten. This leaves high yield corporate credit and emerging market fixed income as better choices in this phase of recovery.
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