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Wednesday, Jan 6

After the distraction of Trump’s persistent attempts to avoid defenestration from the White House, likely Democrat victories in the Georgia Senate run-offs mean the ”Blue Wave” is finally going to arrive in Washington DC. In today’s briefing Capital Alpha takes an in-depth look into what investors can expect from the incoming Biden administration now it has managed to eliminate the legislative friction from a Republican senate majority, opening up the opportunity for it to pursue its policy agenda. Capital Alpha provides its views on what this means for the Covid stimulus package, the energy sector, healthcare and finance. It’s fair to say that Capital Alpha are at the dovish end of expectations, and tomorrow we’ll highlight the more hawkish end, after confirmation of the result which is expected later today. Meanwhile, StoneX explains why investors should be looking to accumulate dirt cheap inflation-sensitive assets now, while Topdown Charts sets out why in the face of a clear, albeit fragile, economic recovery, the time is right for many market rotations to kick-off. Elsewhere, we continue our focus on ESG investing, with Empirical Research Partners explaining why it is the “S” that is increasingly important, and why knowledge of the subject is now a basic requirement to manage institutional assets. They also assess whether record flows into the ESG sector has led to overvaluation in related equities.
  1. fiscal stimulus US Politics Capital Alpha

    1. Democrats take Georgia (imminently); opening the door for an expansive fiscal plan

    With the Democrats poised to take both seats in the Georgia Senate run-offs, Washington-based Capital Alpha has released a series of notes outlining the implications for policy of a Democrat-controlled Senate. The firm’s James Lucier says that with Democrat control, Biden begins in office with the option of passing a big Covid relief bill early in his term, and that a package worth $2 trillion is not unrealistic. Moreover, he says the scenario opens a pathway to do a considerably larger infrastructure bill, possibly including a corporate tax increase as a funding offset and directing fiscal dollars to a range of policy goals. According to Lucier, a package worth $1 trillion would probably represent the low end of reasonable probability, $1.5 trillion to $2 trillion would represent the likely mid-range, and $3 trillion would be the high-end and less probable maximum.

     

  2. Energy Financials healthcare CapitalAlpha

    2. The blue wave sector implications: Energy, Healthcare and Financials

    On a sectoral level, Lucier notes there is a lot the Democrats can do to promote their clean energy agenda with a few extra trillion dollars, which should strongly support the Biden administration’s agenda for the decarbonisation of federal lands, federal government operations, and eventually whole sectors of the economy. Certainly, he says, there is no question the oil and gas industry will face an adverse regulatory environment under the Biden administration, with everything from infrastructure and permitting to decarbonisation and access to capital markets becoming a challenge. Meanwhile, Capital Alpha’s Kim Monk and Rob Smith consider the implications for the healthcare sector. They note Democrats have no qualms about expanding the role of government in healthcare, which they view as a basic right, and expect Democrats to pursue healthcare coverage expansion via a Covid stimulus package and budget reconciliation process. Monk and Smith note coverage expansion poses a risk for the pharmaceutical industry as Democrats may include drug pricing reform as a potential offset. As for financials, Capital Alpha’ Ian Katz explains that a Democrat Senate changes the focus for the Banking Committee. This he says could create short-term headline risk and put certain companies and sectors of the finance industry on the defensive.
  3. Asset allocation Inflation velocity of money StoneX

    3. The year of V – vaccine, value, velocity and Vincent?

    2021 will be the year of “V” according to Vincent Deluard at Stone X. He says with the virus still raging, there will be one last deflation scare in the first quarter, while the vaccine will unleash pent-up demand which will lead to a rapid reflation in the second quarter. Moreover, says Deluard, velocity will increase, which will lead to secular inflation. Investors, he argues should start accumulating dirt cheap inflation-sensitive assets now, and Deluard extends this analysis to where investors should focus for the best reflation and re-opening trades.
  4. Market cycles tactical asset allocation Top Down Charts

    4. Market cycle guidebook; DM equities correction, long commodities

    Callum Thomas at Topdown Charts produces a monthly cycle guidebook that that provides investors with an excellent compendium of charts and proprietary indicators on how the market cycle is evolving across all asset classes, and where turning points are starting to emerge, which then informs his tactical allocations. In the latest report, he describes how as we head into a new year, many of the remnants of last year will echo on: massive monetary stimulus, prospective further fiscal stimulus, inflation upside risk, the global vaccination process, second/third waves, backlogs and supply chain disruption, and a continuation of the fragile, but clear global economic recovery. The “mega theme” (global ex-US vs US, value vs growth, EM vs DM) still enjoys compelling cheap relative valuations, says Thomas, and thus he believes there are likely to be substantial benefits from taking a more nuanced approach to allocations as the time seems right for many market rotations to kick-off. The report, with 70+ charts also has positioning tables and a range of technical indicators that highlight the risk of a short-term sell-off in DM equities.
  5. Equities ESG Empirical Research Partners

    5. ESG and the pandemic – accelerant?

    ESG mutual funds and ETFs enjoyed a banner year of inflows in 2020, garnering almost $40 billion of new assets through to the end of November, doubling the haul from 2019, according to Rocky Cahan at Empirical Research Partners. He says it seems that as in many other facets of daily life, the pandemic has served to accelerate a trend that was picking up steam even before the coronavirus came along. It has been the “S” rather than the “E” or “G” that has being the driving force, notes Cahan, with recent surveys of assets managers showing a large proportion citing social factors were now more important to them given the pandemic. Ultimately, he says, with most global asset owners expecting to increase their ESG budget in light of the pandemic, it appears Covid-19 has cemented ESG expertise as a base-level requirement to manage institutional assets. With that in mind, the big question, according to Cahan, is whether this has led to a bubble in ESG stocks? As ever ERP run their valuation forensics over a swathe of stocks to make an assessment of whether that is the case.