22 Feb 2022
By Fabiana Fedeli
Fabiana Fedeli, Chief Investment Officer of M&G’s Equities and Multi Asset division, takes a closer look at US equities at the one-year mark of Joe Biden’s presidency.
2021 was a year of divergences in global equity market performance, both regionally and at a sector level, and heightened market volatility amid the more uncertain conditions has yet to settle back to pre-pandemic average levels. Developed markets, led by the US, have been the relative winners and energy, IT and financials stocks have led the gains at a sector level.
US equity market gains over President Biden’s tenure are not dissimilar to the stimulus-fuelled returns during President Trump’s first year in office, if divergent at a sector level. Energy stocks have seen some of the strongest gains as they recovered from a dismal 2020 and the tech sector has also outperformed, but returns have been tempered by inflation concerns in 2021.
President Biden has made headway with the $1.2 trillion US infrastructure bill, with $550 billion in new federal spending being channelled into repairing and modernising roads and bridges, investing in public transport, clean energy, digital connectivity and ensuring clean water infrastructure. The infrastructure sector, including renewables, should benefit from the build out in the US and globally. Last year, we witnessed increased corporate takeover activity in the listed infrastructure market, while dividend growth has been providing a degree of inflation protection.
When it comes to equities, it’s not inflation that is the key variable to watch – but rather the growth outlook that surrounds that inflation. As long as the growth outlook is constructive, as is currently the case, this is good for equities – particularly given that from a relative valuation standpoint they are faring better than other asset classes. However, if inflation has a negative impact on the economic outlook or there is a policy error along the way (whereby the central banks tighten too much, too fast) that would change the narrative for equities. Companies with good pricing power and strong balance sheets will be better able to defend margins amid ongoing inflationary pressures and any enduring supply-chain disruptions.
Taxation, following sizeable fiscal stimulus, could also pose a further downside risk for equities ahead, while increased regulation on Tech remains a looming risk for the sector. Any flare up in US-China or US/NATO-Russian geopolitical tensions could also create a more uncertain economic and market backdrop.
Strong US earnings delivery has supported US equity outperformance, and we still expect robust US EPS growth this year. However, the growth differential between the US and the rest of the world may start to narrow. US equity market leadership has been consistent with growth outperforming value, and tech-related stocks outperforming the broader market. If we see a sustained value/cyclicals rotation globally we could see the US lag other regions.
President Biden goes into November’s US mid-term elections with a low job approval rating and wafer thin majorities in both houses of the US Congress. He is already struggling to pass the signature piece of his ‘Build Back Better’ legislative programme. If history is any indicator, then the November elections will see the Republican party take control of the House and Senate. Most Presidents have had to deal with the opposing party controlling congress, including Presidents Trump and Obama. This situation has, historically, not been a bad scenario for equity markets, but it will likely limit the President’s ability to continue spending at the high levels that we have seen in the US over the last two administrations.
US equity markets offer substantial breadth and depth of opportunity across growth and value. The opportunity for active investors is in taking advantage of rising return divergence and broadening valuation dispersions across and within sectors. We expect this trend to continue with the more uncertain inflation, monetary policy and COVID-19 backdrop, which is already providing some good entry points in 2022, but selectivity remains key.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.