The blue wave is rising.
This week Joe Biden is expected to reveal further details about the rumoured US$1 trillion + American Families Plan – an economic package centred around extending support for lower income households. The package could be funded by a raft of new taxes impacting the richest Americans, including a hike to capital gains taxes.
It comes hot off the heels of the unveiling of the US$2.25 trillion Investment and Infrastructure Bill earlier this month. While in March the US$1.9 trillion American Rescue Plan was passed along party lines, delivering a 10-30% jump in disposable income for lower and middle-class households over the next 12 months.
The extraordinary levels of income and investment stimulus being rubber-stamped right before our eyes is something investors can’t ignore.
The US is running a fiscal deficit of 15% of GDP and a large current account deficit. There is no free lunch. These twin deficits ultimately need to be funded, which may have longer-term implications for the USD.
So, how can investors ride the wave?
In the nearer term, household balance sheets, particularly in the US, are in rude health.
Personal savings are now 20% of disposable income versus 7% pre-COVID, giving a sense of the firepower that could be deployed as the economy fully reopens. We could see strong demand for big ticket items (such as autos) and more consumers trading up (buying a premium alternative).
Longer-term, a central pillar of infrastructure stimulus across the world remains decarbonisation. It’s a theme we’ve been discussing for some time and we believe this is currently one of the most significant multi-decade investment super cycles.
Decarbonisation is not just investment in renewables and electric vehicles, but also in grid systems, building battery plants and the redesigning and re-tooling of manufacturing lines.
Beneficiaries, such as materials and industrials companies, still look reasonably attractive at today’s prices, particularly outside the US.
Norsk Hydro, one of our European holdings is a great example. Aluminium is key for “lightweighting” (think electric vehicles, which have to cope with the weight of the battery) and Norsk uniquely produces its aluminium using hydropower, which is very sustainable.
Our investment and ESG analyst, Owen Scarott recently wrote about Norsk Hydro in an article on our website.
Most importantly, investment led stimulus can lead to a more permanent shift in investment preferences and an extended period in which the so-called ‘value’ segment of the market can outperform. Much like what was seen after the 2000 tech wreck.
… But the COVID-19 threat continues to linger
With the attention on vaccine progress in countries like the US and UK, it’s easy to forget that the rollout in some emerging markets has lagged, to say the least.
COVID-19 infections and fatalities in India and Brazil are worrying.
In the past 24 hours the number of new COVID-19 cases reported in India has surged by almost 350,000. Developments in India and Brazil, are likely linked to restrictions easing last year, the slow rollout of vaccines and poor domestic healthcare systems.
It’s easy for investors to disregard the India crisis as many of our lives return to normality. But remember, India is the world’s fifth largest economy, it has around 18% of the world’s population and there are signs of increasing case numbers in neighbouring countries.
This is not to say we are pessimistic about reopening. Ultimately, in our view full-scale reopening and normalisation remains fluid.
A stock we’re buying
Toyota Motor Company
With the aforementioned concerns surrounding COVID-19 we think full-scale international travel remains some way off. Road trip anyone?
With respect to our views on auto demand, we think Toyota Motor Corporation is a solid beneficiary. It is a technologically advanced automaker with strong market share in the US. But its international footprint will also see it benefit from a pick-up in the auto cycle globally, which was already weak going into COVID-19.