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Analysis

How Joe Biden’s stimulus plan shook up global financial markets

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The “blue wave” hit later than expected, but with enough strength to force a reordering of global financial markets.

Victories in US Senate run-off elections in Georgia held on January 5, which handed the Democratic party control of Congress to add to the presidency, jolted investors into overhauling their portfolios in anticipation of the beefed-up fiscal stimulus promised by US president-elect Joe Biden — who detailed his $1.9tn plan on Thursday.

The effects have been far reaching: technology stocks have struggled, while the prices of commodities used in infrastructure projects, such as copper, and shares in machinery manufacturers such as John Deere and Caterpillar have advanced. Global crude oil prices reached above $55 a barrel for the first time since the pandemic rattled markets. And lower-rated US state and local debt has rallied on the promise of extra federal support.

But perhaps the most important impact is in the government bond markets that form the basis for other asset prices around the world. Analysts now expect a splurge of extra debt issuance, and higher inflation, putting pressure on the Federal Reserve to wind down its bond-buying programme and potentially even increase interest rates earlier than expected. Ten-year and 30-year government bond prices have dropped since the start of the year, pushing yields to around their highest level in almost 10 months.

“A lot of assets have been built on the prospects of extremely low interest rates for the foreseeable future,” said Mike Stritch, chief investment officer at BMO Wealth Management. “In terms of financial risks, we think that is one of the big ones.”

The promise of extra spending — which comes on the heels of a $900bn spending bill passed by Congress last month — was “setting the stage for a rise in inflation”, Morgan Stanley economists said earlier this month.

Line chart of US 10-year break-even rate, % showing Investors brace for higher inflation

The so-called 10-year “break-even” rate, a measure of market expectations for price rises which is derived from the price of inflation-protected government bonds, has climbed above 2 per cent. That is up from less than 0.5 per cent at the depths of the crisis last year.

Meanwhile, the leader board in US stocks has switched. Long-favoured tech stocks including Apple, Microsoft and Salesforce have lagged behind the broad market since the run-offs on January 5. By Friday’s close of trading on Wall Street, tech stocks on the Russell 3000 index were slightly down for the year, trailing a gain of 4 per cent for basic materials groups, an almost 5 per cent rise for financials and an advance of about 14 per cent for energy companies.

The tech sector has outperformed since the financial crisis, against the backdrop of lacklustre global economic activity — a trend that was exacerbated during the pandemic. Rock-bottom interest rates bolstered the appeal of businesses whose valuations were dependent on profits in the distant future, while dragging on sectors such as banks.

Line chart of Daily prices, rebased, % change showing Small-cap stocks have risen with the ‘blue wave’ as tech lags

A rotation away from tech into economically sensitive sectors such as small-caps and unloved “value” stocks, including financials, began to take hold last year as prospects grew for a “blue wave” in US elections. But the Democrats’ initial failure to secure a majority in the Senate in November left many investors positioning instead for gridlock in Washington.

The Georgia run-offs reignited this trade. The results were “the straw that broke the camel’s back”, said Bob Doll, a senior portfolio manager with asset manager Nuveen. “After years when you wanted to brag about how many big growth stocks you owned . . . you’re now at the point where you need to have small, value and international stocks in your portfolio.”

Consumers and businesses are likely to remain reliant on the technology companies that filled gaps during the crisis, but the rollout of coronavirus vaccinations and the extra government spending should lift those sectors hardest hit by the pandemic.

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In anticipation of an economic recovery filtering across the American heartland, investors have ploughed roughly $27bn into small-cap stock funds since the start of November, more than reversing the entirety of outflows the funds had tallied in the first 10 months of the year. Small businesses are expected to flourish as Americans plot a path back to normal life. Emerging market exporters are also predicted to benefit as demand rebounds.

Demand for hedges against rising prices has also been strong, with US funds that buy Treasury inflation-linked securities, or Tips, attracting almost $1.5bn of net inflows in the week ending Wednesday, according to data from EPFR. That marked the 15th consecutive week where more money entered these funds than left them.

Column chart of Weekly flows into US inflation protected Treasury funds ($bn) showing Investors seek out inflation hedges

The question now is just how much fuel the Democrats will add to the world’s biggest economy, at a time where monetary policy remains ultra-loose.

“The global economy and US economy are experiencing early cycle dynamics characterised by rising growth, rising corporate earnings, rising prices,” said Erik Knutzen, Neuberger Berman’s chief investment officer of multi-asset strategy.

“But [that is] still in a very accommodative monetary policy environment and . . . with a fair bit of fiscal stimulus coming through.”



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Analysis

Royals nearly drove me to suicide, Meghan Markle tells Oprah Winfrey

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Meghan Markle was left suicidal by her experience with a British royal family that refused to protect her from hateful tabloids and fretted about the skin colour of her unborn child.

Her husband, Prince Harry, was cut off financially by his father Charles, the Prince of Wales, who also stopped taking his calls.

Those were among the revelations when the Duke and Duchess of Sussex — the ex-royals who have settled in California — told US television personality Oprah Winfrey the story of a biracial fairytale romance that captivated the world and has descended into a crisis for the British monarchy.

The two-hour broadcast on Sunday was preceded by so much briefing and counter-briefing by the warring royal camps that it was exhausting before it even aired.

In the event, it had something for everyone. For “woke” fans of Meghan and Harry and committed Republicans, there was new evidence of a cruel and archaic institution that tolerates racism.

For traditionalists, there was the pleasing spectacle of two privileged young people who quit work early and then complained about their family. For broadcasters, there was a rare event in the digital era capable of capturing a truly mass audience. And for those weary of pandemic-era lockdowns, there was the temporary distraction of watching another family’s problems.

The one clear loser was Britain’s royal-watching press. Its members will have sat astonished as Winfrey, one of the US’s most celebrated interviewers, unearthed enough gossipy nuggets in one session to sustain tabloids for a decade.

The Duke and Duchess of Sussex with the Queen
The Duke and Duchess of Sussex sought to distinguish their treatment by royal officials and the Queen, with Markle saying the monarch had ‘always been wonderful to me’ © POOL/AFP via Getty Images

Viewers learnt that Markle is expecting a girl this summer; that she and Prince Harry married in secret three days before the royal wedding; that they were informed their son, Archie, would not have a royal title or official protection; and that they have adopted “rescue” chickens.

“I just love rescuing!” Markle said.

The most gripping part of the interview was Markle’s confession that the stress and isolation of her royal life led her to contemplate suicide. “I just didn’t want to be alive any more,” she told Winfrey. “I thought [suicide] would have solved everything for everyone.”

Markle said she asked a senior member of staff for help but was told: “There’s nothing we can do to protect you.” Rather than checking into a hospital, as she had hoped, she went to an official event that evening with her husband because, she warned him, “I can’t be left alone”.

The pair sought to draw a distinction between the members of the royal family and the institutional scaffolding of the monarchy. Both repeatedly heaped praise on the Queen, with Markle at one point recalling a fond memory of the beloved head of the royal family sharing a blanket with her during a frigid trip.

“The Queen has always been wonderful to me,” Markle said.

But they were critical of the faceless functionaries who run “the Firm”, as the royal family is known, accusing staffers of refusing to protect Markle, in particular, from a venomous tabloid media that was determined to cast her as a villain.

The ex-royals alleged that officials fretted about the skin colour of their son Archie before he was born
Meghan Markle’s biracial identity influenced everything, with the ex-royals alleging that officials fretted about the skin colour of their son Archie before he was born © PA

As an example, Meghan cited a sensational story that the demanding bride-to-be had brought sister-in-law Kate Middleton, the Duchess of Cambridge, to tears during a dress-fitting session. In fact, she said, it was the other way round — but nobody from the palace would correct the record.

“The narrative about making Kate cry was the beginning of a real character assassination,” she said.

The issue of race infused everything, with Markle eventually concluding: “I realised it was all happening just because I was breathing.”

Markle said that while she was pregnant there were “concerns and conversations about how dark his skin might be when he’s born”.

Prince Harry saw their 2018 Australia visit as a turning point. Markle’s charming performance, he argued, had reminded his family of another glamorous — but troublesome — young bride who shone on a similar tour Down Under in 1983: his mother Diana, Princess of Wales.

“That brought back memories,” Harry said.

Markle’s biracial identity — and social media — had made their plight even worse, he argued.

Prince Harry expressed hurt that his father had not done more to support him, but also a measure of sympathy for a man born into a form of gilded captivity. “I’m acutely aware of where my family stand and how scared they are of the tabloids turning on them,” he explained.

“My father and my brother, they are trapped. They don’t get to leave,” he added.

But Harry did. He and Meghan are now living in California splendour down the road from Winfrey, straddling the worlds of British royalty and American celebrity — with their chickens.

“This year has been crazy for everybody,” Prince Harry said. “We did what we had to do.”



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Pharma groups spend billions to tap into booming China healthcare

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Pharmaceutical groups signed partnerships with Chinese biotechnology start-ups at a record rate last year despite geopolitical tensions and concerns over intellectual property rights and data security in the country.

China has opened up its healthcare industry over the past five years, prompting US and European companies to seal deals with local companies to access the world’s second-biggest drug market.

A record 271 cross-border licensing partnerships were agreed in 2020 between multinational groups including Roche, Bayer, AbbVie and Pfizer and Chinese pharma companies, according to data from consultancy ChinaBio. The collaborations involve clinical trials, development and commercialisation and sharing data and are up nearly 50 per cent from 2019 and more than 300 per cent since 2015.

Deals are being signed despite concerns over intellectual property protection and the safety of US healthcare data in China, with analysts saying the market is too big and fast-growing to ignore.

China’s healthcare industry overtook Japan in 2016 to become the world’s second-biggest and is expected to surpass the US within three years. Pharmaceutical spending in China totalled $137bn in 2018 and will reach $140bn-$170bn by 2023, according to data provider IQVIA.

“There has been an increase in both deals where Chinese companies will develop and commercialise innovative drug candidates discovered by western companies and where multinational companies will do the same with cutting-edge Chinese-invented pharmaceuticals outside China,” said Sam Thong, chairman of Goldman Sachs’ healthcare group in the Asian investment banking division.


$170bn


Potential size of pharma spending in China by 2023

Under the Made in China 2025 strategy, a scheme designed to advance the country’s technology and manufacturing goals, Beijing has set targets for domestic drug companies to make progress on innovation and has streamlined the drug approval process.

China’s state medical insurance scheme has also added more branded, non-generic drugs to a list of those that qualify for patient reimbursement, including products by foreign companies such as Novartis, in a move that could boost demand.

Western groups have already reported the financial benefits of their China strategies.

Eli Lilly, the US pharma company, agreed a $255m deal with Shanghai-listed biotechnology business Junshi Biosciences last May to collaborate on a Covid-19 antibody treatment and reported a 41 per cent jump in quarterly profit in January. Eli Lilly’s chief scientist lauded the “exciting” phase 3 trial results for the treatment with Junshi that showed the antibodies reduced risk of hospitalisation and death by 70 per cent.

Junshi said the record string of partnerships proved China’s drugs were of “international quality”.

US was the most desirable region for cross border partnering

Pfizer agreed a $480m deal in September with CStone Pharmaceuticals that gave the US group a 9.9 per cent stake in the Hong Kong-listed company, which focuses on immuno-oncology medicines, as well as an exclusive licence to commercialise CStone’s cancer drug in China.

For Chinese start-ups, the partnerships can be used as a launch pad for their global ambitions, enabling companies to carry out trials and win commercial approval for their products in the west.

Eli Lilly signed a licensing deal worth more than $1bn with Suzhou-based oncology group Innovent in August for the exclusive rights to its lung cancer therapy outside China.

AbbVie, another US pharma group, agreed to pay mainland biotech I-Mab up to $2bn for access to its experimental cancer drug in September.

“This is an important step for Chinese companies because it validates their capabilities — their R&D is reaching a global standard,” said Cathy Zhang, Morgan Stanley’s head of healthcare for global capital markets in Asia.

Column chart of Number of deals showing China pharma partnering hit a record in 2020

But China remains under pressure to better protect intellectual property, a longstanding grievance for overseas companies.

Patent law changes in 2020 gave foreign groups more confidence they would be protected, but “enforcement is still a big issue in practice”, said Rocky Wu, a Shanghai-based partner for KPMG, the professional services firm. “The detailed guidelines on implementation of patent linkage has not officially been published.”

US national security experts are also worried about Beijing gaining access to American healthcare data, particularly genomic information, for both privacy reasons and concerns about the ability to use such data to help develop biological weapons.

The US-China Economic and Security Review Commission, which evaluates the national security risks attached to doing business with China, last year said Beijing had made the collection of foreign healthcare data a priority and tried to gain access to US information through “licit and illicit means”.

Chinese entities have done this through investments, partnerships and sales of equipment and services, the commission said in its 2020 report to the US Congress.

The commission added that “Beijing has placed increasingly tight restrictions on foreign firms’ ability to access and share healthcare-related data collected in China”, despite officially encouraging foreign participation.

Additional reporting by Wang Xueqiao in Shanghai, Thomas Hale in Hong Kong and Hannah Kuchler in New York



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Teachers grapple with how to help students scarred by pandemic

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As staff at Strive Collegiate Academy in Nashville prepare for the school’s reopening this month, principal LaKendra Butler is grappling with the best way to support pupils after a traumatic year in which their education was thrown into chaos by the pandemic.

“Our students are performing 10-15 per cent below the level a year ago,” Butler said. “Right now I’m prioritising their time during the school day and making sure we’re focused on bringing them back . . . [but] longer-term we need to look at how to do school differently. We can’t go back to the status quo.”

Strive is one of tens of thousands of schools around the world, from the US to the UK and the Netherlands, that will reopen their doors in the coming weeks, as students return to the classroom after months of often solitary online study.

A first priority will be regular Covid-19 tests and measures to cut the risk of the virus spreading in schools. The longer-term challenge will be assessing how far behind pupils have fallen in their academic and emotional development and finding ways to rectify the problem with often limited resources.

Getting students back into the classroom is just the start. Many educators believe schools will need to adopt radical new approaches to learning and spend eye-watering sums of money to close the “learning gap” and prevent a generation being scarred, their prospects set back permanently.

LaKendra Butler, left, says students at Strive Collegiate Academy in Nashville are performing 10-15% below the level of a year ago
LaKendra Butler, left, says students at Strive Collegiate Academy in Nashville are performing 10-15% below the level of a year ago © STRIVE Collegiate Academy

“Covid has been the largest disruption to education in history,” said Per Engzell, a researcher at the Oxford Leverhulme Centre for Demographic Science in the UK. “Ninety-five per cent of children were affected and in many countries schools have remained closed since [last] March. It’s totally unprecedented.”

Using detailed testing in the Netherlands, his team has identified an “alarming” average loss of learning equivalent in that country to one-fifth of the academic year — the entire period students were out of school in 2020. The finding “seems to bear out some of the worst misgivings on the magnitude of learning loss and social disparities”, he said.

The pattern is similar elsewhere. Jonathon Guy, research officer at the Australian Education Union, said the learning loss was even more marked for children from marginalised communities and disadvantaged groups. “Demographic factors, low levels of prior achievement and a lack of access to technology are the main concerns,” he said.

Surveys in Australia and other countries suggest widespread disparities in access to computers, affordable internet, safe places to learn and supportive home environments.

Home-schooling in remote Tarpoly Creek, New South Wales. Surveys suggest learning loss has been more marked for children from marginalised communities
Home-schooling in remote Tarpoly Creek, New South Wales. Surveys suggest learning loss has been more marked for children from marginalised communities © Lisa Maree Williams/Getty Images

Luke Sibieta, a researcher at the UK’s Institute for Fiscal Studies, has estimated that British pupils could lose a combined £350bn over their lives as a result of missed education during lockdown. According to a forecast by the World Bank, globally the loss could be as much as $10tn if effective policy responses were not introduced.

Those responses will not come cheap. In the UK, Sibieta suggested £30bn — equal to six months of spending on schools — as a useful benchmark for what the government should consider spending on “radical and properly resourced ways to help pupils catch up”.

Some teachers have sought to learn from approaches adopted after previous disruptions, such as when Hurricane Katrina overwhelmed New Orleans in 2005. Then, a so-called spiralling technique was used to reteach essential missing skills before proceeding with scheduled lessons.

David Steiner, head of the Johns Hopkins Institute for Education Policy in the US, who led a review of “catch up” techniques for Unesco, said the evidence was against strategies that promoted students automatically to the next grade regardless of the gaps in their learning or got them to retake the entire year with a younger class.

Instead, he called for “acceleration” programmes to test students and focus on missing skills essential to the next stage of study. “You need to narrow the list of topics to those that really matter and do ‘just-in-time’ instruction so they’re ready to take regular classes with grade-level peers,” he said.

Children sanitise their hands at a school near Bordeaux, France. Researchers say the pandemic has been the biggest disruption to education in history
Children sanitise their hands at a school near Bordeaux, France. Researchers say the pandemic has been the biggest disruption to education in history © Philippe Lopez/AFP via Getty Images

Butler has carved out two hours during her school’s daily schedule away from normal lessons, to focus on teaching in one-on-one and small group sessions, guided by periodic assessments of students’ progress and surveys of their parents.

She is also exploring more use of tutoring, an approach that has garnered attention around the world, including in a £1.7bn package in Britain. The UK has also appointed an “education recovery tsar” who has made clear that the catch-up would take years of work and “radical” curriculum changes.

James Turner, head of the Sutton Trust, a charity participating in the UK tutoring programme, said this was an essential response. “It’s not the complete solution but the evidence is very strong,” he said, estimating that the country would need 20,000 additional tutors to meet its objective of supporting 250,000 pupils in the current school year.

Matthew Kraft, associate professor of education and economics at Brown University in the US, cautioned that while there was strong evidence for the value of tutoring in small groups, “we know much less about scaling and maintaining its effectiveness”.

He proposed a “peer-to-peer” volunteer system where older students helped younger ones, to reinforce their own learning and give something back.

Jelmer Evers, a teacher in the Dutch city of Utrecht and vice-president of the country’s General Education Union, said the task was best tackled by qualified teachers, despite a backdrop of falling numbers entering the profession. They had greater knowledge of their students’ needs and of the curriculum than external tutors, he said.

For Amy Wood, principal at Mossbourne Riverside Academy in London, student wellbeing and social activities would be as important as academic work when her pupils return on Monday.

She remained optimistic. “Children are more resilient,” she said. “They’ll bounce back.”



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