Biden’s “once-in-a-generation” US$2.25 tn infrastructure plan is aimed at modernizing America’s transport networks over 8 years, and includes substantial funding for initiatives such as cleaner water, transport electrification and high-speed broadband. The expenditure is expected to partly be covered by increasing the corporate tax rate from 21% to 28% and establishing a global minimum tax for multinationals. The proposal could see weeks and months of negotiation ahead, although House Speaker Pelosi has reportedly set a goal of 4th July for the passage of the new spending in the House.
Markets are in the midst of a significant turning point
From November 2020 until about mid-February 2021, investors largely enjoyed a “goldilocks” scenario for equity markets. Optimism on the vaccine front generated confidence about an economic reopening while rates remained extremely low, enabling both growth and value to rally sharply together. As bond yields started to rise from mid-February 2021, equity valuations became the central focus for investors and with that came the rotation and higher volatility, which has deeply impacted the best performing “Stay at Home” technology shares. Financials, Industrials and REITs – those most likely to benefit from reopening – have continued to move higher along with interest rates.
US 10-year Treasury yields may rise further and average 2.5% in coming years. However, once valuations among secular growth sectors adjust for higher discount rates, those with superior earnings power could move ahead. Even in a higher rate environment, “high growth” companies that can sustain growth and drive higher cash flow could ultimately gain.
Implications for portfolios
There remain areas of the market that show interesting value and solid growth prospects, but may not fall into the traditional definition of deep value or cyclical shares. Strategies focused on identifying cheap growth – “growth at a reasonable price” – have outperformed both growth and value this year. Healthcare falls within this category – an area that is likely to deliver strong earnings for years to come, but which is not yet fully priced for that growth.
The ongoing selloff in many of Citi analysts’ preferred secular growth stories, like cyber security, fintech and renewable energy could also present an opportunity to add to these long-term “Unstoppable Trends” at better valuation entry points than just a few weeks ago. As Biden’s proposal favors clean energy and transport electrification, this could negatively impact fossil fuel producers, refiners and distributors. Companies building next generation, climate sensitive industrial equipment and other transformative technologies could be clear winners, thus potentially accelerating opportunities within “New Energy” – which is also one of Citi’s “Unstoppable Trends”.