Biden will tackle some big issues in the US

Thankfully it is now clear that the democratic will of the electorate will result in president-elect Joe Biden and vice president-elect Kamala Harris assuming office towards the end of January.

The transfer of power has clearly not been an easy one, and the events at the US Capitol building demonstrate how highly charged the situation is. 

With the Georgia senate run-off elections providing two Democratic wins, in some senses the Blue Wave narrative is back on the table – however, it is not that simple. 

Climate change response, Big Tech, risky assets, value versus growth and inflation fears have all been key contributing themes

The Supreme Court is extremely tilted, and although the Democrats won at the Federal level, at state level one could argue that the Republican party was rather more successful – a Red Trickle.

But it is more than just the political situation that is giving rise to uncertainty – climate change response, Big Tech, risky assets, value versus growth and inflation fears have all been key contributing themes.

Inflation expectations

Inflation has been directly impacted by a number of factors – food prices are up significantly, and it is no surprise that basic commodities have revived from a pandemic low.

We should expect such forces to boost inflation as the economy normalises, and extraordinary liquidity in the form of money printing should also lead to dollar depreciation (and inflation). 

Equally, a tightening labour market in certain key sectors, ongoing deglobalisation and supply chain constraints will drive inflation up, not to mention a central bank committed to overshooting their inflation target. 

On the contrary, there are a number of forces that continue to put a dampener on inflation – the economy is still weaker than a year ago, there is plenty of slack in the labour market overall and structural forces like demographics and automation continue.

Likewise, the increase in government debt and greater prevalence of (relatively) unproductive zombie companies will push inflation lower. We can simply conclude that the inflation picture is likely to be extremely noisy throughout 2021 and may weigh on risk assets.

Regulating Big Tech

Big Tech was a key driver of the equity markets recovery, with the technology-heavy NASDAQ comfortably outperforming the S&P. 

The Republican presidency has already commenced legal proceedings against Amazon, while the Democratic House of Representatives published a report of over 400 pages outlining a sequence of misdemeanours, many relating to monopolistic control of particular aspects of social media markets. 

It would appear that a rare/unlikely feat – a consensus in the Capitol – has been achieved, and that some form of action will be taken against Big Tech. What will this mean for equity markets that have come so heavily to lean on their stellar growth?

A package of prosperity?

The Biden election campaign framed their message around a ‘Build Back Better’ theme, aiming to spur growth and put the economy on the front foot in dealing with the climate crisis. 

The big number of the latest fiscal stimulus package was quick to make the headlines, but as ever, the devil will be in the detail when the second stage of his plan is announced next month. 

Climate change plans, improving public infrastructure, education and broadening access to health care (including the Covid-19 vaccine) are likely to feature heavily, but realistically will take several years to advance meaningfully.

More specifically, expect attention to focus on areas such as pollution abatement, continued development of renewable energy sectors, power generation transformation, housing, mass transit and highways, and public land use. Each of these will offer specific opportunities that investors will be able to access.

In the near term, as expected, president-elect Biden's plans have steered towards more immediate economic relief, around further cash payments to individuals, extension of special unemployment benefit programmes created earlier during the pandemic, and further aid to state and local governments. 

The pause in student loan payments are planned to be extended and $30bn (£22.16bn) in rent payment assistance for lower income households to be made available. Overall, these ought to support the economy as it struggles to get back on track.

All of this may not satisfy the more radical wing of the incoming administration, many of whom believe that the very essence of ‘capitalism’ itself requires a thorough overhaul. 

They see the current pandemic and the pending climate and biodiversity crises as allowing for a deeper ‘reset’ of our economic paradigm. At most, my expectation is that a Biden presidency will work within the existing system, but might experiment with new policies in areas such as job guarantees and wealth taxes. 

Deeper questions around ‘perpetual growth’ versus ‘planetary boundaries’ will not be answered by the 46th President, whereas well thought-out labour reforms that seek to emphasise the importance of ‘social’ in environmental, social and governance may land better.

Reasons to be optimistic

In general, investors appear to have quite an upbeat view of how the economy and markets will unfold in 2021, with a nagging doubt about an inflationary grim reaper pushed to the sidelines for now. 

A continued surge in risk assets espouses a view that low rates, quantitative easing and other direct policy measures have delivered sufficient liquidity to prevent debt being a major issue as we come out of this crisis. 

But there are known risks in some emerging markets around currency denomination and debt – and the potential for rising corporate debt defaults if activity falters – for there still to be a few clouds on the horizon.

Overall, I expect that politics will continue to dominate the news headlines, as the latest impeachment progresses, and we will come to learn more about the vagaries of the American political system, in the form of the ‘reconciliation’ process and ‘filibustering’.

Eoin Murray is head of investment, at the international business of Federated Hermes