Biden's first 100 days off to a good start

“The main takeaway is that the Biden administration is indeed exceeding expectations,” says Angela Mancini, partner at political risk firm Control Risks. With Covid-19 high on the administration’s list of priorities, it has well exceeded its target of 100 million doses one hundred days in. Currently, every single US adult who wishes to be vaccinated can get one, with half of all US adults having received at least one shot as of April 19.

But Brian Arcese, portfolio manager and equity analyst at Foord Asset Management, says that Biden benefitted from the Trump Administration’s Operation Warp Speed, which was designed to accelerate vaccine development, manufacturing and distribution. He adds that the vaccination drive would have taken place at a similar time even if Trump won the election, though Biden deserves credit for implementing a national mask mandate to curb viral spread. Still, on May 12, The New York Times reported that Covid-19 cases had fallen in over half of all states in the past two weeks.

Markets have rewarded Biden as schools and workplaces begin to return to some degree of normalcy. The S&P 500 has soared by around 8.5% since markets closed on Jan 20 as Trump departed the White House. This is the best stock performance in a new president’s first 100 days since the 1980s. On May 7, S&P 500 closed at US$4,232.60 ($5,613.70).

“The US has done an impressive job vaccinating more than 100 million people as of the start of May,” says Paul Hsiao, global economist at PineBridge. “For markets, these also support risk assets since it removes the likelihood of further growth-restraining lockdowns in the near term and increases expectations of a faster resumption of economic activity.”

Macroeconomic performance has also been correspondingly bullish. Main street has begun catching up with Wall Street as non-farm employment in March rose by 916,000 — the near strongest gain in seven months and almost double February levels. Unemployment in March fell to 6% from 6.2% in February, with the Economist Intelligence Unit (EIU) raising their 2021 real GDP growth forecast from 4.5% to 5.5%.

Still, any progress made could be quickly scuppered by new Covid-19 variants that defy American vaccines. Chile, which saw a resurgence in Covid-19 cases despite a rapid vaccination programme, is a cautionary tale that mass vaccination does not spell conclusive victory over the pandemic. With new mutant strains testing the effectiveness of existing vaccine solutions worldwide, Arcese considers this the greatest “left-field” risk to markets going forward.

Tax and spend

Besides fighting Covid-19, the Biden administration is also looking to the future of US recovery. The new president has introduced heavy spending with a US$1.9 trillion American Rescue Plan (ARP) to kickstart the US economy and US$2.7 trillion in spending over eight years under the American Jobs Plan (AJP) to build sustainable infrastructure for the US. He has also proposed an US$1.8 trillion American Families Plan (AFP) to reduce socio-economic inequality.

To pay for this, Biden is proposing to increase the top individual federal income tax rate from 37% to the pre-Trump rate of 39.6% and tax capital gains as ordinary income for taxpayers with over US$1 million in income. He hopes to raise corporate tax from 21% to 28%, double the minimum tax rate on foreign profits of US companies from 10.5% to 21% and introduce a 15% minimum tax on firms with US$100 million or more in net income.

Samy Chaar, chief economist at Lombard Odier, has called Biden’s fiscal stimulus a “fiscal revolution”. The massive supply-side spending on infrastructure, he argues, represents a return to spending levels last seen in the 1960s, serving as a long-term corrective to decades of underinvestment. With infrastructure spending to be frontloaded and tax increases backloaded, he sees positive fiscal inputs in the US for the next 5–8 years.

But weak Democratic control over the senate means that actual policies will likely be somewhat diluted. “Taxation is the issue least likely to generate bipartisan consensus and most likely to divide the Democratic Party...it will take an extraordinary amount of political capital to achieve what will probably be modest achievements,” says Stephen Dover, chief market strategist and head of Franklin Templeton Investment Institute.

Despite proposing around US$4 trillion under the AJP and AFP, EIU expects only US$2 trillion to pass. A silver lining, says Cailin Birch, global economist at EIU, is that renewed infrastructure investment is desired by both major parties. CNN reports that Senate Republicans are prepared to cut a leaner bipartisan deal on infrastructure, with a Reuters/Ipsos poll finding large majorities in favour of infrastructure investment.

Thomas Costerg, senior US economist at Pictet Wealth Management, sees this fiscal stimulus continuing to boost growth. Yet this growth will likely be moderated since the expenditure will be spread over several years and is focused on the supply side. GDP growth is seen to be 6.5% in 2021, though this will likely moderate to around 3% in 2022. Kathy Bostjancic, chief US financial economist at Oxford Economics, has brought forward anticipated QE tapering to early 2022 with the first rate hike anticipated for 1Q2023.

Key to Biden’s plans is fighting climate change, with climate provisions built at the heart of the AJP. It calls, for instance, for transport infrastructure to be built using more sustainable and innovative materials such as “cleaner” steel and cement. Time notes that the plan will introduce modernisations to limit traffic, reducing congestion and thus wasteful energy consumption. Biden has vowed to halve US emissions by 2030 and create “millions of good jobs” in clean energy, electrified transport and general decarbonisation.

“On the green infrastructure side, led by the US, the outlook for major public sector-led investments continues to strengthen,” says Salman Ahmed, global head of macro at Fidelity International. Kris Atkinson, portfolio manager at Fidelity International, expects “a significant increase in US green government bond issuance” and sustainable bonds more generally. The green bond market currently stands at 1% of total debt outstanding.

But fiscal stimulus has led to inflation jitters. While consensus attributes the present uptick in inflation to base effects, Stefan Hofer, chief investment strategist at LGT Bank Asia, fears that growing signs of supply disruptions and associated cost pressures could see inflation metrics rising for longer than expected, increasing the risk of interest rate tapering. Arcese of Foord sees inflation as an important factor to consider before entering US markets, though it is unlikely to emerge as a threat in the next quarter.

‘America is back’

One thing that has remained consistent for the Biden administration vis-a-vis its predecessor, however, is its tough stance on China. The frosty exchanges between the two great powers at the Alaska Summit in March shows that their rivalry remains alive and well. “We’re in a competition with China and other countries to win the 21st Century,” Biden told Congress on April 28, exhorting the US to “build back better” in response.

“We are seeing a strong continuation of the theme [under the previous administration],” says Sherry Madera, chief industry & government affairs officer at London Stock Exchange Group (LSEG). She sees the Alaska Summit as setting the “mood music” for US-China relations, noting that Biden has not rolled back Trump’s executive orders on China and even imposed sanctions on Chinese officials. In response, China is likely to build new trade alliances in Central and Southeast Asia, potentially leading to trade regionalisation rather than bifurcation.

Despite these tensions, relations are unlikely to further deteriorate. “Biden’s first 100 days has been much quieter on the US-China trade front. The administration has largely sidelined the tariffs issue for now by launching a strategic review of the Phase One Trade Deal, which is due to report in the next few months,” says Stephanie Kelly, deputy head of Aberdeen Standard Investments Research Institute. Tariffs are seen to remain at current levels with no escalation.

Nathan Sheets, chief economist at PGIM Fixed Income, also notes that it is questionable if US allies will be as enthusiastic as Washington to cooperate on China-related issues. So far, he observes, the Europeans have been somewhat distant and more wary about confronting China than expected. Having considered the US as a less reliable partner during the Trump years, one might imagine that the Europeans may be looking to hedge their bets in case of a Trump resurgence, limiting their zeal in teaming up with Washington against Beijing.

The technology sector has been a particularly heated site of geopolitical contestation. “We see many of our European clients, particularly those not in strategic sectors that have inherently higher risks, like tech, doubling down on China,” says Control Risks’s Mancini, noting that China is where most of the growth is for such firms. US tech companies are concerned about significant supply chain disruptions in the foreseeable future, and are reviewing their investment decisions and supply chains in light of continued geopolitical risks.

Another pillar of Biden’s foreign policy is a commitment to multilateralism. He has reversed his predecessor’s “America First” approach by rejoining multilateral initiatives like the Paris Climate Agreement and the World Health Organisation. While the role of these organisations are limited, the forum they provide for constructive discussion will likely reduce global uncertainty, says Kelly. Lombard Odier chief investment officer Stephane Monier sees global trade improving due to renewed multilateralism, marginally softening the US dollar.

One such multilateral initiative of consequence is a proposal by the OECD to implement a global minimum corporate tax. While the US has previously resisted such reforms, Kelly believes that the Biden administration and Yellen Treasury are more keen on leading the debate on this issue. The final rate implemented is seen to fall between 12.5% and 21%.

Now, economies that rely purely on tax arbitrage are likely to suffer if such a scheme is implemented. But Dipinder S Randhawa, adjunct senior fellow at the S Rajaratnam School of International Studies (RSIS), sees Singapore remaining competitive under such a regime. “Countries such as Switzerland and Singapore that hitherto attracted investment partly because of lower tax rates will continue to attract investment with their superior world-class infrastructure and competitive liberalised services sectors,” he writes in an RSIS commentary.

Despite a sweet first 100 days, Arcese of Foord believes that Biden’s long honeymoon is nearing its end. While it has been relatively easy to pass much-needed Covid-19 stimulus in a state of crisis, Republicans will be putting their foot down on further stimulus. In particular, says Birch of EIU, Biden will be in for a fight over the AFP, which includes bold policies like universal preschool and free community college.

For now, however, the new president can congratulate himself on an auspicious start to his term. “I stand here tonight one day shy of the 100th day of my administration. A hundred days since I took the oath of office...and inherited a nation — we all did — that was in crisis,” he told Congress. “Now, after just 100 days, I can report to the nation, America is on the move again.”