Global Economy & Markets, Weekly Roundup 30/03/21

President Biden is expected to call for higher corporate tax rates

Key Takeaways
 
MSCI World Value stocks have underperformed Growth stocks by -71% since the Global Financial Crisis, due to: (i) subdued headline economic growth; (ii) low interest rates that have boosted valuations of longer-duration sectors (Technology) and; (iii) strong corporate profitability of the US Technology sector.

Note that the FAAMG’s (Facebook, Apple, Amazon, Microsoft, Google) market capitalization accounts for c. 20% ($7.5 trillion) of the S&P500 market capitalization, albeit down from 25% in August 2020, nearly twice the size of the TOPIX index ($4 tn).

The underperformance of Eurostoxx versus the S&P500 during the same period, by a wide margin of -61%, reflects, inter alia, the “Value versus Growth” narrative. Euro area headline indices are Value-centric, with euro area financials recording strong losses since 2008, of -57%.

Valuations of euro area financials (0.6x Price/Book Value) remain on a deep discount relative to their US peers (1.3x Price/Book Value). Note that bank stocks came under pressure on Monday on both sides of the Atlantic (SX7E: -1.3%, S5BANKX: -2%) as a few institutions are facing severe realized losses after a US hedge fund defaulted on margin calls.

Since the beginning of the year, higher Government bond interest rates and improving economic growth expectations, particularly in the US, has led to a rotation of leadership into Value. Indeed, the MSCI World Value index has increased by 10% ytd (+25% since the US elections), while the Growth Index is down by 1% ytd (+13% since the US elections).

Upward revisions north of +6% for 2021 US real GDP growth, due to strong fiscal support and rapid inoculations have supported the Value vs Growth trade. Note that, as of March 28th, 28% of the US population had received at least one vaccine dose, with 15.4% being fully inoculated, pointing to a benign outlook for the path of the pandemic and the respective lockdown measures.

Combined with an already resilient economic activity (see Economics) and the recent $1.9 tn (9% of 2019 GDP) fiscal package starting to be rolled out during March, pandemic-related relief fiscal stimuli have likely closed their cycle after having reached circa ¼ of GDP cumulatively since March 2020.

In that context, investors’ attention increasingly turns to the Presidency’s longer-term investment plan (Build Back Better), and to the way it will be funded. In the event, initial proposals are expected on Wednesday, with the total size, reportedly at c. $3 tn, spread out in the next decade and focusing on infrastructure, tackling climate change, child care and education.

On the funding side, recent commentary from the Treasury Secretary Yellen, supported the view that a large part will come from increased federal revenues, mostly via higher taxes, including an increase of the headline corporate tax rate from 21% to 28%, partly reversing the 2018 corporate rate tax cut from 35% to 21%.