In late March, President Joe Biden announced a US$2.3 trillion infrastructure plan, which was met with mediocre responses from the market. When Trump took office four years ago, he promised to invest between US$100 million to US$200 million, but that never materialized. After four years of delay, the US$2.3 trillion infrastructure proposal put forward by Biden now requires a direct investment of US$1.6 trillion to be delivered over eight years. In other words, the annual growth of US$196.2 billion, which is less than 1% of GDP, is not enough to attract market appetite.
Another reason for the lack of excitement in the market is, of course, the imminent tax hikes to follow. To pave the way for the midterm congressional elections, the Democratic Party is eager to prove to voters that they will act in accordance with their motto of robbing the rich to subsidize the poor. In the next year or two, the industries most affected by the tax hikes will include raw materials, automobiles and parts thereof, apparel, and durable goods.
Biden proposes to raise the top marginal income tax rate to the same 39.6% in the Obama era from its current level of 37%. He also called for the long-term capital gains rate to be boosted to 38.6% from the current high of 23.8% for the upper-income brackets. In principle, increasing income tax and capital gains tax on the wealthy would have the effect of diverting capital away from the U.S., while being favorable to the development of the middle market.
China is believed to be the number one country to benefit from increased infrastructure or tax reform in the U.S. China’s exports of infrastructure-related goods to the U.S. in 2020 represented approximately US$295 billion, or 63% of China’s total exports to the U.S. In terms of industry distribution, machinery and equipment, chemical products, minerals such as cement and glass, metal products, plastic and rubber products, and transportation equipment account for a relatively high percentage of exports. In terms of exports to the U.S. as a percentage of industry revenue, the machinery and equipment industry is the highest at 44%. These figures do not yet factor in the export of services in the event the bid for the U.S. infrastructure project is successful.
It is believed that Biden will use the budget reconciliation process to pass the infrastructure package with a simple majority in order to avoid being obstructed by the Republican Party. In view of the infrastructure plan and the proposed tax increase are well in line with expectations, the author reserves his forecast for the S&P 500 to end the year at 4,118 points.
(Tommy Ong is a Managing Director for Treasury and Markets at DBS Hong Kong.)
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