Will They, Won’t They?

Talk of fiscal stimulus has provided an undercurrent of support for US markets for months. For most of the last six months, it was an unrealistic dream. But now the talk may be for real. As we signaled two weeks ago, the politics changed after the election. Inaction now looks less attractive to both sides, with balance in the Senate hanging on two January run-off elections in Georgia. At the same time, economic worries are rising. November jobs numbers confirmed that the recovery is slowing. The terrifying “surge-on-surge” of Covid-19 across America dominating TV screens threatens to curtail economic activity again just as fiscal help from the CARES Act is running out. If a deal comes together this week, building on the $908 billion bipartisan package put together after Thanksgiving, the focus will turn to the White House. Will President Trump sign a bill, to solidify his legacy and help Republicans ahead of the crucial Georgia Senate run-offs? Or will he refuse to give a helping hand to the economy just as President-elect Biden takes over?
As the politicians have delayed, Americans have suffered — at least those at the middle and lower-end of the income scale who have been hit hardest by job losses. Last week’s jobs data showed how weak the US economy remains. Yes, vaccines are on the way much sooner than anyone believed possible earlier this year. But no surprise that President-elect Biden has signaled to Democrats that he wants help for the economy in the meantime, even if it falls short of their pre-election dreams of a $2+ trillion package. As those dreams foundered on the election results, with Democrats losing seats rather than seeing the expected so-called “Blue Wave,” pressure on Republicans to act has also built up. No longer in thrall to the pre-election push to paint Democrats as free-spending Socialists, Senators can be more responsive to worries of the business community, and to Georgia voters who may want their incumbent Republican senators to vote for fiscal support rather than hold out as fiscal hawks. The timing is very tight for a deal this week, but markets will be disappointed if it doesn’t happen. They will also be looking across the Atlantic to see if the “will they, won’t they” Brexit talks can finally come together or if the UK will be going into the trade wilderness come January 1, 2021.
Observations and the takeaway for investors:
1. A paradigm shift on fiscal policy: will it survive politics, here and around the world?

The Coronavirus Recession appears to have cemented a dramatic shift in thinking among US economists across the political spectrum. There is now a broad academic consensus that fiscal stimulus is needed — immediately and likely for some time to come — notwithstanding sharply rising deficits and debt.

This was clear at an event last week hosted by the Brookings Institution and the Peterson Institute for International Economics, boldly titled: Fiscal Policy Advice for Joe Biden and Congress. Among participants, former Fed Chair Ben Bernanke, Michael Strain of AEI and Harvard professor Kenneth Rogoff — known for his warnings of the dangers of excessive debt — joined Harvard economists, and occasional Democratic policymakers, Lawrence H. Summers and Jason Furman in support of more fiscal spending and less worrying about deficits, not just in the US but in developed economies worldwide.

Summers and Furman laid out their case in a new paper arguing that demographic and economic changes have led to such low, persistent interest rates that fiscal policy should no longer aim at a zero deficit over time. Fiscal policy should instead be used to soak up excessive private savings and invest in future growth, building human capital through education and better social care, as well as publicly funded physical and digital infrastructure that will enhance business productivity. Not everyone signed on fully, but support for more expansionary fiscal policy has been building for some time, even before the pandemic, as low interest rates and inflation persisted despite the sharp decline in unemployment through February.

The shift in thinking has been most notable among typically conservative central bankers as well as the International Monetary Fund, which used to be known for generally counseling fiscal caution. For investors, two big questions. First, will greater tolerance of fiscal deficits spread now among the public and politicians? If so, would this augur well for growth, but with more inflation risk? Japan’s experience suggests that it will take a lot to spur inflation, and Japan’s long-run economic performance has begun to look a lot better in comparison with other developed countries. Investors have taken notice, with the Nikkei taking off in the past month.

So far, most Americans would probably see as far-fetched the notion that more borrowing and spending by the government would strengthen our economy and be good for future generations. Can a new president persuade them otherwise?

2. What is happening with the economy — here and around the world?

Economic difficulties and recession certainly have an impact on popular opinion of how governments should act. This year’s wrenching fall in output and rise in unemployment cleared the way for extraordinary monetary and fiscal support, not just in the US but around the world. As the OECD pointed out last week in its semi-annual Economic Outlook, support has been more effective than many expected. But the latest data in the US and Europe confirm that recovery has faltered in the face of renewed disease and, in Europe, a return to widespread lockdowns. But after becoming gloomier during this year, the OECD is now cautiously upgrading its forecasts for 2021. The reason: the vaccines.

3. Oh yes, the disease, and — thank goodness — the vaccines

This year has shown government fumbling and cultural differences dividing West and East, irrespective of economic development. The US and European responses to Covid-19 have led to far more illness and death than needed to occur. Deaths per million in the US are now at 860, compared to 18 in Japan and fewer than four in China. The US toll will get worse before it gets better, public health officials warn, after many Americans flooded airports and roads for traditional Thanksgiving visits despite the early November surge in infections. Cases and, importantly, hospitalizations have soared beyond earlier record levels, with new daily infections reaching a startling 205,513 over the weekend, a 69 percent increase from the prior month. As hospitals reach capacity, state and local officials are expanding restrictions. Not a happy end to 2020.

But 2021 will be a year of relief and recovery, thanks to the power of private ingenuity, helped by government support. Safe and effective vaccines have been developed, tested and produced in an extraordinarily short time with different methodologies and characteristics across different countries. The UK is already beginning to vaccinate its population with the Pfizer-BioNTech drug developed in Germany by two Turkish immigrants and produced in Belgium. The US FDA is expected to issue its regulatory approval soon, after following its normal practice of retesting raw trial data provided by companies as well as examining the results and reports of the companies. The European Medicines Agency (EMA) is on course for a decision in late December or early 2021. According to the Chinese Academy of Engineering, China will have 600 million doses of Covid-19 vaccines ready for market this year, demonstrating yet again its logistical prowess. Importantly, almost 200 countries are joining the COVAX effort spearheaded by the Global Alliance for Vaccines (GAVI). Under this innovative facility, countries can pool risks and ensure vaccine supplies by committing in advance to buy vaccines at reasonable cost from many pharma companies. Lower-income countries in the facility will initially get vaccines for free, financed by richer nations. So far, the US has not agreed to join.

4. Investor Takeaways

Public Markets

Global equities continue to overcome all of the market hurdles investors expected earlier in the year. Clearly, this year has caught most investors by surprise as most would have expected the pandemic in March to have had a bigger impact on market returns. Recent market highs across global equities have been a tailwind effect that have kept net and gross exposures at or close to highs. Recent developments with more promising vaccine news, a peaceful transfer of power in the US and lots of other market catalysts continue to propel global markets higher. Yet, the disconnect that we have spoken about many times before continues and year to date through the end of November much of the same trends continue. US equities continue to be the driver of 2020 markets; however, emerging markets, Japan and the rest of the world are also starting to accelerate.

Isolated from the rally has been European equity markets. 2020 looks to be the worst year on record for European equities’ relative performance since the 1980s. Europe was the first to spike on Covid-19 cases and now most are expecting the lockdown to factor into lower growth projections and a drag on the economy. Coupled with the fact that Europe’s economy is much more biased towards older industrial and cyclical names — compared with the US where most of the talk is Facebook, Apple, and Microsoft — it has been harder for European equity markets to climb out of Covid-19. The dynamics and shifts in markets may continue to be a drag — though investors may also see temporary spikes in European equity markets when value/cyclical and industrial names have their sharp (and up until now) short-term rebounds. Obviously, European markets have had a large dispersion with Denmark being the best performing as compared to Austria, which has been the worst performer YTD.

Emerging markets continued to rally this week after a strong November. Non-Asian markets once again led performance. On a three-month basis, EM Asia is now underperforming EM ex-Asia, as measured by respective MSCI indices. We are not surprised by this development. History tells us cyclical markets tend to outperform growth when the global economy is coming out of a crisis.
It is worth highlighting that we are in the early innings of an emerging markets recovery and that investors’ interest remains relatively anemic. YTD, net foreign flows into emerging markets remain at -$22.4 billion as tracked by EPFR data, on top of the -$14 billion in 2019. While stronger economic data and positive vaccine news have combined to provide the right impetus, some investors remain cautious given the geopolitical risks. Just this week, The US House of Representatives unanimously passed the Holding Foreign Companies Accountable Act (HFCAA), which could force China ADRs to be delisted in the US unless regulators are able to inspect their financial audits within three years. While we did not see a meaningful share price reaction to the passage of the bill, the news may spook investors looking to establish a toehold. In addition, fiscal deficits will increasingly become an issue in 2021, particularly for countries that spent beyond their means in 2020, including Brazil and South Africa. In our view, prudent asset allocation and selective stock selection led by on-the-ground experts will continue to be the best remedy to these risks given the potential market opportunities.

Commodities. As the global recovery picks up steam on the back of several vaccine rollouts, we expect commodity exporters to outpace and catch up to the technology-related sectors that have characterized much of emerging markets’ positive performance this year. Recent flow data backs this up. For example, the month of November witnessed the highest monthly inflow in Brazil since we began tracking in February of 2008.
Another sign underscoring the cyclical recovery is the price of copper which is up over 13 percent in the last month. China accounts for over 50 percent of global demand for copper, and we expect China’s recovery to remain on track. Base metals have looked past recent lockdowns and GDP downward revisions and are now beginning to price-in strong rebounds beginning in the second half of 2021. Storable metals tend to endure near-term volatility better than oil for example, where supply and demand need to clear in the spot market. We also expect manufacturing and construction — the main source of metal demand — to significantly increase from current levels.

Private Markets

Private Equity. Consistent with public markets flying higher, the recent IPO bonanza is expected to continue into 2021. Several high-profile startups registered S1s in recent weeks. Included in this group were Airbnb (targeting a valuation of around $42 billion), DoorDash ($30+ billion), and Roblox ($8 billion), with Instacart, Epic Games, and Coinbase likely not far behind. Interestingly, unlike the wave of IPOs in the early fall that included the likes of Snowflake, Sumo Logic, JFrog, and Unity, the next crop of companies going public seems concentrated in consumer and gaming businesses. Investors will be closely watching not only the US IPO market but companies going public in China as well. Both ByteDance and Ant Financial are still likely IPO candidates in 2021.

RockCreek’s private team continues its sustainable direct investing across health, education and climate with a recent investment in BioAge. Read more about this innovative company impacting the lives of our older communities here.

Real Estate. While investments in industrial and digital real assets have already garnered significant investor demand, one overlooked area has been the burgeoning US single-family rental (‘SFR’) sector. The sector presents an equally attractive long-term secular opportunity which has also been accelerated by the pandemic. The demand for newly built rental homes is being fueled in part by the wave of millennials who are forming families and seeking a home in the suburbs, and all that comes with it — a yard, neighborhood feel, parks and good schools. Adding to that demand are young singles and empty nesters who want the convenience of a professionally managed rental community and who want something bigger than an apartment.

There are approximately 15-16 million rental homes (single-family and townhomes) in the country, according to Census Bureau data analyzed by Amherst Capital. To put that in perspective, about one household in eight in the US lives in a single-family rental property today. Currently, approximately 6 percent of new single-family homes are purpose-built rentals, which would result in only roughly 700,000 new units over the next ten years. Given the strong demographic trends, it is likely that there will be much greater demand for such units than the current pace of production, presenting a multi-decade investment opportunity.
RockCreek Update
The RockCreek team continues to work efficiently from home and the office. As ever, we are grateful to our team, clients, and partners and hope everyone had a safe and joyous holiday.

RockCreek celebrated Thanksgiving by supporting Martha’s Table, a non-profit that helps strong children, strong families and strong communities by increasing access to quality education, health and wellness and family resources. In addition to financial support, many team members continue to volunteer at Martha’s Table as well as other non-profits across the country.

Team RockCreek

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