How US Policies Will Influence Markets in January

Driven by U.S. President-elect Joe Biden’s promise to provide an economic package in the ”trillions of US dollars”, global financial markets rallied in the first week of 2021. The economic package is aimed to be revealed this Thursday. All major global financial markets were risk on and delivered 1.5-3.0% in weekly returns. The Nasdaq index and Euro Stoxx 50 index led the way up +2.43% and 2.60% respectively last week. The US’ S&P 500 index was +1.83%. Locally the Hang Seng index was +2.38%.

To start 2021, AQUMON’s diversified US ETF portfolios were +0.02% (defensive) to +0.52% (aggressive) year to date. AQUMON’s SmartGlobal HK ETF portfolio, with more regional exposure to Hong Kong/China, was +0.00% (defensive) to +1.61% (aggressive) year to date.

If you didn’t read our 2020 year-end summary we also wanted to let our readers know that with the MSCI World index +13.89% last year, AQUMON’s diversified US ETF portfolios were +2.49% (defensive) to +12.29% (aggressive) last year. AQUMON’s SmartGlobal HK ETF portfolio, with more regional exposure to Hong Kong/China, was +1.31% (defensive) to +16.59% (aggressive) in 2020. So our ETF portfolios continued to deliver solid risk-adjusted returns for our investors.

Back to markets topics. Although we rarely touch on politics, mainly because of its indirect impact on global financial markets, there is no denying that markets in January will likely be dominated by US political driven headlines and their subsequent policies. So with US President-elect Joe Biden’s Inauguration Day just 9 short days away (January 20th), we wanted to address a few key points this week that will likely drive financial markets as a result.

US policies will likely be a big driver of markets in January

Normally, it is the uncertainty and not actual politics that drive financial markets. In the first week of January, 2 Democrats defeated the Republican incumbents in the state of Georgia’s senatorial race, bringing Democratic control to the US’ House of Representatives, the Senate, and the White House. 

This ‘blue sweep’ was often viewed by certain market analysts to be negative for financial markets since they believe the subsequent policies, resulting in higher corporate taxes and increased regulation, would be detrimental for US stocks. 

What investors need to realize is that this is unlikely so black and white. We need to look closer at the details. The result of the Georgia senate runoff resulted in a 50-50 split in the Senate. With more impactful policies like a sweeping change to the US corporate tax minimums likely requiring a super-majority vote, passing such changes will have its challenges in the current Senate makeup. So looking ahead, we think investors should likely apply a discount to this ‘blue wave’ effect and policy changes will probably be more moderate in nature.

Sector-wise, one area we are keeping a close eye on is the regulation related pressure on US technology giants. This has now become a bipartisan issue (meaning both Republicans and Democrats support this) and if stiffer regulations are passed, there will be downward pressure on the US technology sector. 

A positive catalyst for markets is that this runoff result will bring the Democratic party’s support for additional stimulus to hold the US economy over during the COVID-19 pandemic. As we’ve been seeing since March, monetary stimulus has been one of the top financial market drivers. Although we may favor international and emerging stock markets in 2021, we still believe there is further upside in US markets this year.

US dollar strengthens so far in 2021 but the downward trend should continue

A minor surprise for most financial analysts so far in 2021 is the strengthening of the US dollar even amidst the weak economic data to kickstart January. Looking at the US Dollar Index, after being down -6.85% in 2020, is actually up +0.30% in 2021: 

 Why has the US dollar been on a losing streak to begin with? This has a lot to do with the US Federal Reserve (Fed) signally it will keep interest rates at 0% until 2023 to prop up the US economy during the pandemic. With the expectations of rates to remain low for the next few years, this has driven investors to look to invest elsewhere instead of safe havens like the US treasury and dollar thereby driving the US dollar down.

But looking this past week where economic data like the US jobs report came in worse than expected (the first time we saw job losses since April) yet the US dollar rose as a result is something many analysts are closely watching. This is important for investors because if the dollar does reverse its course in 2021, this traditionally would not be as beneficial for International and emerging market stocks as we previously suggested to investors.  

In what case might this happen? On the off chance that markets suffer a major setback, there will likely be a rush for safe assets like the US dollar and this could push up its value.

Even so, our fundamental outlook for the US dollar in 2021 remains bearish. With interest rates remaining low for multiple years and additional stimulus expected, this will result in further risk-taking and downward pressure in demand for the safe haven asset (US dollar). The ‘blue sweep’ mentioned above where US President-elect Joe Biden has pledged to expand the monetary stimulus program will likely push up US inflation and drag down the US dollar in 2021. 

From a holistic portfolio standpoint, investors should be a little more aware of their US assets and currencies like the Euro, British pound, Australian dollar, and even the Chinese yuan are likely better positioned. Also, this will bode well for both international and emerging stocks particularly in Asia where we feel regionally is set to reopen economies quicker than western markets.

“Divergence” is the keyword to describe regional performance in 2021

We think 6-12 months down the road when investors are looking back at the start of 2021 “divergence” may be a word they think of when they think of regional returns. Never in recent history has this been more the case whereby we are seeing global economies crippled by 1 singular factor (COVID-19) and have such a wide range in terms of recovery speeds. This is a major reason why we have been suggesting to investors for multiple months to need to further diversify in 2021. Beyond reducing investment portfolio risk, the other main reason is to capture potential return upside as we continue to see an early rotation from technology into cyclical/lagging sectors.

If you have any questions, please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON. Stay safe outside and happy investing!

 Ken

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s major investors include the HKUST, Cyberport, Alibaba Entrepreneurs Fund and the Bank of China International's affiliate. 

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