The North American Income Trust plc

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An update from our investment manager, Fran Radano - 21 May 2021

In April, there were further details of US President Joe Biden’s vision regarding infrastructure and taxation, which came on the heels of another round of fiscal stimulus. The White House announced an infrastructure bill valued at about US$2.5 trillion over 10 years, financed by various increases in corporate taxes over the next 15 years. The proposed legislation includes green initiatives with a price tag of roughly US$1 trillion, including US$400 billion in tax credits for carbon capture, investments in renewables, upgrades to housing-stock efficiency, and modernisation of transportation and buildout of electric-vehicle (EV) infrastructure. In our view, US stock prices have already embedded some degree of these policy tailwinds into their valuations since Democrats won control of the US Senate in January of this year. The Biden administration’s proposal marks a big step forward in terms of US climate policy action, but we have seen that the market is not yet prepared to price in further gains to companies and sectors that should benefit from the associated spending. Uncertainty remains as the tax increases needed to fund the proposals (which target corporate tax rates and the top 1% of earners) are significant enough to cast doubt on how much of the current draft will remain in the final legislation.

As widely expected, the US Federal Reserve (Fed) left its benchmark interest rate unchanged during its April meeting, with the main substantive change to the post-meeting statement being an upgrade to the Fed’s characterisation of the risk outlook around the Covid-19 pandemic, removing the reference to “considerable risks” and instead simply noting that risks “remain.” Fed Chair Jerome Powell again stressed that while the central bank acknowledges that inflation has moved up recently, it believes this was due to “transitory factors.” This remains the most critical signal from the Fed that it intends to look past the expected inflation volatility this year, implying (in line with the view from Aberdeen Standard Investment’s in-house economists) that employment and coronavirus containment will be far more instructive than short-term inflation in crafting its short-term interest-rate policy and timeline for tapering.

Remarkably, in our view, as of the end of the first quarter of 2021, US nominal GDP is now back above its prior peak level in the fourth quarter of 2019, a short time before the pandemic struck. We have seen this sharp rebound reflected at the company level, as corporations are posting better-than-expected first-quarter results and raising full year guidance for 2021. While companies have noted higher input costs (especially in certain commodities), this largely has been surpassed by confidence on their ability to pass on additional costs. If anything, companies are raising their margin outlooks due to strong operational gearing to volume growth coming out of the cycle. We believe that this dynamic should provide sufficient support for earnings growth in 2021. Beyond 2021, we anticipate that the market’s focus will shift towards sustainability of growth as the cycle normalises.