Many banks (IBs and PBs) have given their stance on what they generally think the market will look like this year. The basis is the potential fiscal stimulus with the new administration, the massive liquidity being pumped into the markets, the low-interest-rate environment (even negative for the western European ones). Based on this backdrop, they are very bullish on Equities generally, with the exception of Citi, Soc Gen, and BOA. A couple of them venture into speculation on the Senate elections.
Well, let’s make sense of them all. And here’s my take :
Biden’s win and the blue Houses have the potential to implement the following policies :
- Fiscal spending will increase; $1.3 trillion plan including green proposals.
- Higher corporate tax rate to 28%; create a minimum tax rate of 15% on book income.
- Restore top rate of personal income tax to 39.6%; raise capital gains tax to ordinary rate for those earning above $1 million.
- Implementation of wealth tax.
- Maintaining the existing measure against China.
- Carbon tax support.
- Scaling back some of the measures, e.g., bond-buying.
- Rejoin world organizations and perhaps TPP and other free trade pacts.
- The yield curve will steepen. The difference between 30 – 5s has widened to its widest over the last 10 years.
- Inflation will set in. This is what the FED is looking for.
- Value stocks will benefit. Growth stocks will suffer as both Houses will implement the Anti-trust laws to manage the Tech firms.
- Higher bond yields.
- Stronger USD in the short term.
- Companies that are highly leveraged (a lot of them are guilty of it) will suffer.
What is the broader story for Asia and particularly China?
Do not expect the type of exceptional returns we saw last year. Expect a dual economy globally. Things have started in motion, and the de-coupling will quicken the pace. It will not be just trade flows, but you’ll see on the currency front, data centers, supply-chains reliance, international settlements. This noise will distract the markets, but one thing is for sure, the pressure to support one giant vs. another will increase. There will be more pressure on Chinese tech firms both from the US and Chinese governments. Alibaba/ Ant will no longer be a tech but a fin.
As for your portfolios, pls consider the following :
- Reduce duration on your fixed-income portfolio
- As the yield curve steepens, financials benefit.
- Reduce your exposure to companies who had leveraged a lot last year to shore up their balance sheets.
- Consider value stocks. They are relatively cheap.
- You may want to fine-tune to tech companies that focus on 5G, data protection, and the likes within the growth sector. Consumer tech will face challenges from the new laws.
- As the interest rate rises and the yield curve steepens, you may want to consider receiver swaptions. You don’t have to hold till maturity.
- We have alternatives to traditional fixed income instruments. Our alternative includes our trade receivables linked to GLCs and good credit names like Sainsbury, Taobao, Cisco, etc.
For those who run a business, you’ll need to consider how to implement measures that will protect you from such pressures and not get into the cross-fires. Do not be surprised to see CNY being an international settlement currency in time to come. For now, relook at your portfolios and stay tuned to our morning meetings, where we will share our views on the market conditions and the appropriate strategies for the year. We do not just analyze secondary research from PBs and IBs; we analyze the information from the conversations we have with certain authorities in some jurisdictions. And we present market intelligence for your benefit.
On a final note, happy new year to all, and may you have a prosperous year ahead.