Mitsubishi UFJ, the Japanese financial services giant whose estimated $3 trillion in assets under management ($339 billion in the U.S. alone) make it the world’s fifth-largest bank by total assets and second-largest bank holding company, has issued a new report outlining key issues and risks that newly inaugurated U.S. President Joe Biden will tackle during his first 100 days in office.
“We enter 2021 with elevated political, economic and public-health risks,” said Tom Joyce, head of MUFG’s Capital Markets Strategy Group, which authored the report to better equip MUFG’s senior executives to understand and respond to the market and macroeconomic issues facing the new administration. “While the tailwinds are formidable–including the advent of a covid-19 vaccine and aggressive fiscal stimulus—the year ahead will likely be characterized by higher volatility and more frequent market corrections.”
In the report, “The First 100 Days,” released on Thursday, MUFG strategists say they share the consensus view that the 2021 recovery will occur in stages, with economic underperformance in the early months of the year giving way to above-trend growth in later quarters.
Globally, they expect this recovery will carry through unevenly during the year, with significant regional dispersions, and variation by industry sector, business model and demographic group: manufacturing recovering ahead of services, durable goods ahead of retail services, large cap companies (which have access to capital markets liquidity) over small businesses (which rely mostly on banks and local lenders), and higher-income workers faring better than their lower-income counterparts.
Reflation, reinvigorated
Additionally, MUFG notes, the return of Democratic Party control of the U.S. Congress has “reinvigorated” the reflation trade. With rising expectations of greater fiscal stimulus and its effects on consumer spending, jobs and economic activity, MUFG says cyclical assets—industrial, material and commodity companies, for example—along with treasury inflation protected securities (TIPS) should outperform.
The firm noted that U.S. inflation expectations have “increased dramatically” since the U.S. election, noting a 26 percent rise in Citi’s long inflation index compared to a 1 percent rise in the short inflation index just since November. That said, the firm’s strategists stopped well short of inflation alarmism.
“Inflation readings in the first half of 2021 will look artificially high due to (year-over-year) comparisons to early 2020,” they wrote. “While inflation pressures are building near term through fiscal stimulus, supply chain disruptions and higher energy prices, we expect inflation to normalize to lower levels over the medium term due to pre-covid structural headwinds as well as post-covid economic scarring.”
Overall, they expect higher potential volatility in 2021, driven on the economic and market front by high valuations and rising inflation, higher sovereign and corporate debt levels, more climate-related natural disasters, and the various wild cards of covid-19 economic and health recovery.
Tackling the K
From a policy standpoint, the Biden administration will have to tackle these issues with a diminishing set of monetary-fiscal policy tools, amid heightened geopolitical tensions (notably U.S.-China), a sharply polarized U.S. electorate with the potential for domestic unrest, and the rising threat of political populism.
The group expects the Biden team to focus in its early months on moderating the so-called “K-shaped” recovery—i.e. the vigorous recovery seen capital markets contrasting sharply with parts of the economic that continue to struggle—by providing more support for the latter. Additionally, it believes the new administration will use a “light green” overlay (i.e., an environmentally-friendly agenda) in its domestic and foreign policies with respect to trade, taxes, infrastructure, the U.S.-China relationship and on other fronts.
MUFG’s strategy team expects non-U.S. assets to outperform in 2021, due to more effective virus suppression in much of the Asia Pacific region, a smoother cyclical recovery for industrial manufacturing in China and Emerging Markets, a widening valuation gap between U.S/non-U.S. assets, a weakening U.S. dollar that will ease global financial conditions, modest increases in U.S. corporate tax rates, a slowdown in U.S. corporate share buybacks, and greater vulnerability of U.S. risk assets to a discount rate shock.
Despite all of the risks, MUFG strategists note that there is cause for optimism. These include the emergence of multiple vaccines with greater-than-90-percent efficiency, and rapidly improving rollout protocols; significant global monetary and fiscal response, very low interest rates, robust credit financing markets, a well-capitalized U.S. and global banking system, an uptick in the U.S. savings rate, a comparatively more stable global trade regime outlook, and gathering momentum around global manufacturing and industrial recovery.
And—even in the hyper-polarized U.S. political environment—the Democratic Party tilt following this month’s Georgia Senate runoff election could give Biden much-needed room to maneuver his policy agenda.
