Previewing the Biden economic and foreign policy plans

In this 25-minute video, Geopolitical Strategist Thomas Mucha, Macro Strategist Michael Medeiros, and Multi-Asset Strategist Nanette Abuhoff Jacobson explore the investment implications of Biden’s domestic and foreign policy agenda and opine on which asset classes, factors, and industries they expect to outperform in this new environment.

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This is the third in my inflation “series” of blog posts based on ongoing client conversations. In the first one, I explained why rising inflation is not an imminent threat, but could be down the road. The next one compared today’s inflation worries with those that arose following the 2008 global financial crisis. Now I’d like to shift to a topic of even greater interest to many clients: the implications of higher inflation for investor portfolios.

Inflation can affect a portfolio in multiple ways over time. One way is through its potentially profound impact on the basic equity-bond relationship, which is typically critical to the performance and resilience of a diversified portfolio.

Dissecting the relationship

Bonds have often rallied (or at least mitigated downside) during equity market selloffs, thereby providing portfolio diversification benefits. What some investors overlook is…

In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.

#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?

There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.

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#2: What’s your take on what a Biden presidency might look like?

Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said…

After 62 lawsuits, a forceful (and ultimately futile) challenge to the electoral vote count, and two runoff Senate elections in the state of Georgia, the 2020 US elections finally appear to be over — in January 2021. The end result looks increasingly likely to be a narrow Democratic Sweep: Joe Biden as President, a Democrat-led House of Representatives, and a 50/50 party split in the Senate with Vice President-elect Kamala Harris (Democrat) acting as a tiebreaker. 

The two Georgia runoff elections were pivotal because they determined which party controls the Senate chamber. Even though the Democrats’ majority is razor-thin, it could have significant implications for the scope of President-elect Biden’s legislative agenda in areas like spending and taxation, as well as for regulatory decisions and Cabinet appointments.

Policy implications

In the near term, I think the Biden administration will have a lower bar to implement more stringent COVID-related lockdowns and other restrictions. While a more aggressive virus containment policy could delay the economic recovery, I also expect…

“Dual circulation” has become the latest catchphrase in geopolitical chatter around China. Broadly speaking, it refers to the government’s long-term plan to power the Chinese economy through both external and internal channels — but with more emphasis on the latter by spurring household incomes and domestic consumption. (See my last blog post: Consumers are the engine of China’s growth.) In that sense, it’s consistent with the ongoing theme of China’s decoupling from the US and other countries.

In my view, dual circulation is not really a departure from the path China has been on for some time now, but rather a formalization of some aspects with a name attached to it. That being said, I have a few differences of opinion on what it means relative to many interpretations I have read in the media.

1. The word “circulation” matters

The mainstream narrative is that dual circulation marks a sharp pivot inward and a “closing off” of the Chinese economy as part of a stepped-up drive toward self-sufficiency. I have a somewhat different take. The way I see it, the thrust of the plan is to…

The massive amounts of fiscal and monetary stimulus injected into the global system last year have sparked debate around the prospect of potentially higher interest rates going forward. And the financials sector often tops the list of likely equity-market beneficiaries in a rising-rate environment.

Our take? Without trying to make a “call” on the interest-rate outlook, we see a compelling relative return opportunity in some interest-rate-sensitive financials — select multinational banks, insurers, and diversified financial service names — with strong fundamentals and underlying growth metrics.

It’s about the fundamentals

Understandably, the financial sector’s chronic underperformance and multiple “head-fakes” toward a possible recovery over the past five to 10 years make it difficult for many investors to…

Several of my 2020 blog posts have explored China’s thriving innovation ecosystem and rapid transition to a digital economy — a hugely important investment theme for sure, but I’d like to shift gears this time to the subject of Chinese debt and domestic consumption.

Our internal investor dialogue around China has raised a number of provocative questions. One of the best ones asked recently was: Will rising debt ultimately derail Chinese consumption? The short answer, in my view, is no.

On the topic of debt, some of my colleagues have studied China’s consumer debt and concluded that the pace at which it is growing looks unsustainable in the long term. I tend to…

Remote learning, social distancing, and student safety aren’t the only challenges facing the higher education sector amid the protracted global health crisis. Colleges and universities worldwide are also currently grappling with declining enrollment rates, relatively flat tuition, and steep discounting to entice prospective students. In response, to make up for lost revenue, many institutions are cutting salaries, delaying retirement contributions, and slashing non-essential capital expenditures. Some are even eliminating academic programs and increasing endowment spending.

Despite these headwinds, we continue to like the higher ed municipal bond sector for many of the same reasons laid out in our June blog post and see attractive opportunities in select areas of the market. Of course, deep credit research will be critical to…