The Biden Stimulus Plan has gathered alot of headlines because of the enormous scale of the investment – approximately 2 trillion dollars if the Democrats get their way. Some of this will be financed by raising taxes on Wealthy Individuals and Corporations and some by issuing debt.
From an investment point of view, there are a number of long term implications:
Inflation to increase
Government or Central Banks pumping substantial amounts of money into the economy (through Spending/Bond Buying) typically creates inflation as there is more money to purchase goods and services. Individuals and businesses can borrow cheap money when interest rates are low which further increases demand for goods and services. Increased demand will push the cost of good and services. The Federal Reserve recently said that they don’t see inflation as a problem at present but it’s difficult to see it not becoming an issue in the next 12-18 months.
Deposit Rates to remain low
With interest rates at low levels, inflation will be higher than interest rates and money on deposit will be eroded and lose value over time. Interest rates will likely increase but that does not mean that Bank Deposit Rates will increase. Banks are pushing further into charging negative interest rates (now charging personal customers with €1m plus).
Global Shares to see positive returns over next 12 months
Stock markets have correlations with interest rates. As a rough rule of thumb, if interest rates climb above 2% and are expected to increase further, shares should start to decline. Shares also have a correlation with Fiscal Stimulus (Government Spending) and Monetary Policy (Central Banks buying bonds is the most common). When either of these two increase, stocks markets should increase also. As the Biden Plan sets out to raise taxes on Corporates, this will moderate company earnings growth. We would still expect positive growth in Stock Markets over the next 12 months.
Commercial Property to decrease over next 12 months
Property contained in investment funds tends to be commercial property/office space. With a strong preference among workers to not return to the office on a full time basis, demand for office should decrease which we expect to have a corresponding impact on commercial property prices
Crypto – Who Knows!
Cryptocurrency as an asset class is in its infancy. What started out as a currency is now more so a store of value. Crypto does have a more significant role in the future economy with notable business people endorsing it recently such as Paul Tudor Jones and Elon Musk. More institutions are accepting Bitcoin as payment such as Microsoft, Starbucks and more. Tesla being the notable company to withdraw from accepting Bitcoin payments. In a conversation on LinkedIn with an Irish Fund Manager, he advised me that Bitcoin was too volatile to be considered for mainstream funds in Ireland. That is changing the US and will likely change here. Demand may drive that as more and more people are interested in Crypto as an investment. The funds industry may have to provide a product to meet demand. With ‘Stablecoin’ coming to the market soon, this may the first actual Crytocurrency