HEY BIG SPENDERS!
£1.4tn package from Biden and Harris stokes inflation fears
THE imminent arrival of a big spending Joe Biden and Kamala Harris-led White House has reawakened inflation concerns in the United States and raised the prospect of higher interest rates.
The interest yield on American 10-Year bonds climbed sharply to 1.138pc, its highest level since the start of the pandemic, after the presidentelect unveiled a vast £1.4trillion spending package. This is in addition to the £729bn leaving present from Donald Trump approved by Congress in December.
At the core of the Biden package is a cheque for over £1,000 to be paid to every American household, in addition to the £438 already in the post to citizens following the departing Trump’s stimulus.
Biden’s far-reaching package includes new funding to speed the Covid vaccine rollout and funds designed to help cities and states plug huge budget deficits built up as a result of the pandemic. The presidentelect is making it clear that the current proposal is only the down payment on a further economic package which could lavish hundreds of billions of spending on infrastructure and clean energy projects, such as a national network of charging stations for electric cars. The president plans to fund some of this by rescinding tax breaks for the wealthy which were part of the Trump agenda.
‘Right now markets are celebrating the additional stimulus and see it as a bridge to a fully re-opened economy,’ Jeff Buchbinder, the top equity strategist at the advice network LPL Financial, told data provider Refinitiv. ‘On the other side of it there is the chance that markets will pay for this in the form of sharply higher interest rates or tax hikes.’
The new round of support proposed for the US economy comes amid fears that output is stuttering and unemployment surging again as the second wave of Covid-19 sweeps across the country, locking down several regions including California, the nation’s most productive and prosperous state.
The latest US labour market data released on Thursday showed that 965,000 joined the unemployment queues in the last week. Millions have been sidelined by the pandemic with 284,000 – not receiving jobless benefit – currently seeking funds from an emergency pandemic assistance programme.
With infections and deaths rising in the final weeks of 2020, US retail sales fell 0.7pc in December. Oxford Economics said the data ‘bodes ill for the economy’s performance in the first quarter of 2021’. In spite of surging bond yields and fears of renewed inflation, Federal Reserve chairman Jay Powell has made it clear the intention to continue with the massive programme of bond purchases – quantitative easing – as part of the effort to keep interest rates low to support the pandemic affected economy.
His comments were intended to allay market fears that the Fed would pull up the monetary drawbridge now that the bigger spending Democrats control the White House and Congress.
WHAT’S HAPPENING?
WHAT are the big themes for investors this year? Obviously, the pandemic and all its tentacle-like implications and effects has to be the biggest consideration.
The next most important issue has to be the environment, but this is a huge area and one which is very poorly defined.
That means there are opportunities for charlatans and snake oil salesmen to take our money on investment opportunities that have all the fashionable abbreviations.
ESG – environmental, sustainable and governance – is the acronym du jour and the field is bursting with tiresome technical terms in an area few of us will fully understand.
Sounds daunting, but this is such an important area, you mustn’t let it put you off.
WHY DOES IT MATTER?
ESG scrutiny is going to be applied to all companies if they wish to attract and keep investors. even the oil producers and other obvious sinners will be wearing corporate sackcloth and ashes to persuade us of their new found creed. This means that share prices will be impacted, and that will affect us all.
WHAT SHOULD I DO?
INTERESTING new ideas and technologies are often found in the micro world of small start-up companies. Problem is, these can be hard to research properly and more important, very difficult to invest in directly.
For those that do finally make their way on to a stock market, much of the early value may have already been taken by backers who got in from the start.
Which is all a long way of saying it is not very practical for small investors to grab a slice of this action.
Better, then, to look for a fund that may have the expertise to identify those future successes.
In the UK we have the benefit of Investment Trusts, which are funds that trade like stocks, so it is easy to buy and to sell.
A couple of key areas I will look at in more detail in future columns are the management and storage of energy and the development of hydrogen power.
ANY SUGGESTIONS?
The Gore Street energy Storage Fund has a good spread of storage businesses in the UK and europe.
This you should have as a longer-term investment as its price trades at a discount to the value of its assets (currently around 12 pc) though that is not uncommon with such trusts.
It aims to provide a remarkably high dividend yield of around 7pc.
This is not a start-up industry but a well established lithium-ion battery technology and provides multiple income streams.
So is it risky? Yes but with already operational units and in an area of growing demand, this green is not only good but financially gratifying.
Then there is US Solar Fund, which, although priced in US dollars, is tradable in the UK. It is still in this sector, but gives some good spread of companies.