All Governments are under pressure to deliver the vaccine.

The general economic outlook is aided by the pressure upon all governments to roll out their Covid vaccine programmes. While supply chains may be under pressure, a good level of vaccination is expected in developed countries to see a full re-opening of economies in Q3 so that growth can then accelerate and broaden. China is at an economic advantage as it is less dependent upon a vaccine roll out. The economic data from China is very good with industrial production and retail sales continuing to rise. Within continental Europe the vaccine roll out has been hampered by EU bureaucracy, purchase and supply problems. This slow roll out is likely to be a brake on an early economic recovery.

While the level of US Covid relief and economic stimulus is expected to be reduced in size by Republican demands as it passed through Congress, Joe Biden can expect the majority of his policies to be funded. Of the US$1.9tn package announced US$1tn is earmarked for immediate financial relief for families and workers, US$400bn for vaccinations and re-opening schools and US$440bn aimed to support businesses and regional governments. The payment of US$1,400 to every US citizen is expected to have a significant impact and a boost to consumer spending and US economic activity as happened in the last round of stimulus cheques sent straight to every adult citizen.

The full US financial and investment programme is worth US$5.2tn and is expected to result in an increase in inflation in the USA. Current rates of inflation are 1.4% and are expected to rise above the Federal Reserve’s inflation target of 2% in the second quarter of 2020. Between March and November, US citizens saved into their bank deposits US$1.56tn more than they did during the same nine months of 2019. Economists expect that it will not be long before this money starts filtering back into the economy as liberty is restored to consumers.

The Fed will be reluctant to do anything to US interest rates to counter inflationary pressures. They are likely to start to withdraw quantitative easing (QE) measures first before any action on interest rates. Most investors expect that interest rates will remain exceptionally low for the next few years. This will mean bond yields will remain low and support higher equity valuations. The Feds expected approach could mean no changes to interest rates until 2023.

This environment of low interest and a control over inflation this year will be good for equity valuations but real returns in government bonds will be challenging. Short duration credit will be useful if interest rates rise and inflation increases in the near term, while long dated credit helpful if there is a worsening of the Covid conditions and a stalled or delayed recovery. At present we hold both in our Edition 34 portfolios.

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