Last week was momentous for the US. As a pro-Trump mob prepared to storm the Capitol, runoff elections in Georgia saw Democrats take control of the Senate, giving the party unified charge of both the Congress and the White House for the first time since Obama’s first eight months in office.
Wednesday’s (January 6) victories by Jon Ossoff and Raphael Warnock, both beating Republican incumbents slated to retain their seats, will give President-elect Joe Biden much-desired freedom to advance major policy changes without Republican support. Infrastructure spending, fiscal stimulus and climate change legislation are all on the table.
US stocks closed 0.6% higher on Wednesday (January 6), and US 10-year Treasury yields rose 0.08 percentage points to 1.04% by the end of the New York trading day – the first time in six months that they had risen above 1%.
Given that analysts and investors had expected a split Congress, it will be interesting to see how they revise their forecasts in the coming weeks.
“Normal multipliers would suggest adding 1 percentage point to US GDP this year and next. This would take our forecasts to 4.8% and 4.5% for 2021 and 2022 respectively, up from 3.8% and 3.5%,” said Keith Wade, chief economist and strategist at Schroders. “Such growth would reduce unemployment and close the output gap faster, which in turn would mean greater inflationary pressure. Consequently, we would be looking for an earlier rise in the Fed’s target interest rate, potentially in 2023 rather than in 2024.”
Mansoor Mohi-uddin, the chief economist at Bank of Singapore, said: “We raise our US GDP growth forecast from 5.0% to 6.0% for 2021 and lifted our one-year forecasts for 10-year Treasury yields from 1.20% to 1.50%. The main risk to our view is a surge in inflation, causing the Federal Reserve to start tapering its quantitative easing in 2021, but we expect the dovish central bank will wait until 2022.”
AsianInvestor asked six investment professionals to share their views on how Democrats' unified control of both houses of Congress would affect investments.
The following contributions have been edited for clarity and brevity.
Elliot Hentov, head of policy research
State Street Global Advisors
The yield curve moved only moderately in the two months since the election, but more rapid steepening can now be expected. The post-vaccine recovery will take hold in earnest over the course of 2021, and more expansive fiscal plans could further lift long-term rates even if there is less movement on the short end of the curve.
Greater fiscal deficits, along with easy monetary policy, are likely to accentuate the weakening of the US dollar. This will be partially driven by the relative return assumptions on US risk assets. US equity sectors with greater tax exposure, for example, those who benefited most from the Trump tax cuts, and those less exposed to public spending may face lower margins.
Another reason for capital to re-allocate to non-US equity markets is that the latter’s growth should recover nicely with the availability of the cheaper vaccines, and Europe and emerging markets will only enjoy the upside of lower policy volatility on trade and the spillovers of higher US fiscal spending.
David Chao, global market strategist, Asia Pacific (ex-Japan)
A Democrat sweep is good for US and Asian equities – a unified government is much more likely to pass a host of additional economic aid policies later in the year to further help the depressed American economy recover by keeping many households and businesses affected by the pandemic financially afloat.
This stimulus will give a demand boost to Asia’s export-oriented economies that sell products and services to the world’s largest consumer market. Keep in mind that the Asia Pacific region is also the most exposed to cyclical factors, and its economies and markets will gain relative to global peers.
We will continue to see rotations from US equities to Asia Pacific equities – not only because the region has done a far better job containing the pandemic and should see a quicker rebound with the vaccine rollout – but also because the US dollar is expected to weaken further in 2021 due to valuation and structural reasons. The fiscal stimulus is just going to have to accrue on the federal government balance sheet as there are no expected tax increase offsets.
Furthermore, I believe 2021 will be the year for the Chinese and the American consumer to really propel the global economic rebound. I’m also bullish on commodities – such as industrial commodities and oil, as well as other cyclicals such as financials and materials.
Xavier Chollet, senior investment manager, thematic equities
Pictet Asset Management
A Democratic sweep is positive for renewables, e-mobility and green buildings
It will facilitate Biden’s Climate Plan. The plan could come via recommitment to the Paris agreement, a green infrastructure bill or a potential new carbon tax.
We expect a significant acceleration in renewables, with wind and solar being the only winners. Global demand will drive installation growth.
We expect an even faster acceleration in electric mobility. New legislation will leave car producers no other choice but to adopt electrification. E-mobility companies could see a strong rebound in 2021 due to a potential pickup in auto production, and the increasing penetration may drive revenue growth.
Green buildings will also accelerate, driving demand in innovative insulation materials, efficient energy management and heat pumps.
Esty Dwek, head of global market strategy, dynamic solutions
Natixis Investment Managers
With the Democrats just barely sweeping the White House, the House and the Senate, President-elect Biden should be able to pass more of his agenda than previously anticipated. That said, with a razor-thin majority, he will not have carte blanche.
We expect further stimulus spending and some infrastructure spending, as well as tax hikes. We believe that this news is even more positive for equity markets, as reflation and the reopening of trade are supportive for cyclicals, at least in the short term. We also expect non-US stocks and commodity markets to benefit from this outcome, with hopes for a quicker return to normal boosted by the vaccine rollout and additional stimulus measures.
We are underweight sovereign debt given the expected rise in yields, and given inflation expectations, we prefer credit. With further fiscal support, high-yield default rates should remain contained, and the segment should do well. We still see opportunities in emerging markets’ hard currency corporate debt, where the potential for spread tightening is the biggest.
Patrick Brenner, Asia head of multi-asset investments
Democrats’ victory means that they now have control of both the House and the Senate, and thus are in a position to implement much of President-elect Joe Biden’s agenda. There is an increased probability of greater fiscal spending, but also a potential for higher taxes, particularly on the corporate sector.
We believe that this is ultimately positive for economic growth, which could provide support for equities, while the associated higher inflationary pressure warrants a more cautious stance for duration. This also means that within equities, investors should look to diversify from growth to value and maintain a good mix in terms of style.
The US dollar is likely to remain weak, which is beneficial for emerging market assets, but we see that some US dollar exposure would be a good hedge against any surprise tapering of easing by the US Fed should the economic recovery become stronger than expected.
Sean Taylor, chief investment officer for Asia Pacific and head of emerging market equities
Market participants have cherished the results of the Senate election in the US. Hopes for another major fiscal package have outweighed the concerns around a potential increase in tax rates. Risk-on is very hard to go against now, which mainly rests on new stimulus hopes that Democrats control all three branches of government.
In the medium term, Democrats’ control of the Senate could be slightly negative for US equities. Firstly, larger fiscal packages could reduce the level of support from the US Federal Reserve, and secondly, tax hikes would directly impact corporate earnings. Therefore, we favour international equities, are more selective and prefer laggard areas, and more balanced on cyclicals versus structural growth.
Three positive factors could increase forecasts: firstly economic data has been more resilient despite the latest lockdowns; secondly, the fiscal package in the US was greater than expected; and thirdly, the vaccine news is better than expected.