We are expecting some profit-taking when the global equity markets continue its ascent in 2021. We remain optimistic, with the vaccine rollouts that are going extremely well.
The US administration’s plan to raise individual and capital gains taxes on the wealthy to fund long-term fiscal initiatives is a net positive for the US economy in our opinion. The spending would be implemented over a 10-year period with the tax revenue collections over a 10–15-year period, slightly expansionary for the US economy. It however remains to be seen whether a substantial part of the plan would be implemented.
On the positive side, the economic recovery would be fueled by the planned fiscal spending of about US$4 trillion in the long-term. The notable spending on businesses in the proposals are long-term spending on electric vehicles, healthcare and semiconductor manufacturing.
With these planned expenditures, inflation concerns began to surface. The US Federal Reserve continues to reiterate its stance of not reducing its quantitative easing (QE) support for the economic recovery. We are of the view that inflation in US will trend up in the near-term with long-term bond yields hovering at a higher level compared to last year. This does not mean we are expecting a runaway inflation in the long-term as the economic growth will be sub-par. Nevertheless, we should be prepared for the Federal Open Market Committee to discuss a “QE tapering” in some form in their future meetings.
The stimulus spending globally is necessary to help affected economies get back onto a sustainable growth path. It is also important that these spendings are going to the right areas like research and development, investments that create jobs, improve productivity and competitiveness. The governments have by and large been on the right track. So far, major economies of the world are notably focusing on Renewables, Healthcare and Digitalization in their planned budgets.
China, being the first country to recover swiftly from the pandemic, continues to be cautious in not wanting to derail its economic growth. We believe the People’s Bank of China and Chinese government will not act to slow growth this year given the yet uncertain outlook on the pandemic recovery outside China. At the same time, inflation is still running below 1%, giving them sufficient room to manoeuvre on the monetary policy front.