Summary

The 6 Capital Alpha Analysts focused their analysis on the Build Back Better (BBB) Act and De-carbonisation agenda, Health Care, Crypto and FinTech regulation, Big Tech, Industrials & Defense.

Firstly, with James Lucier whose main talking point was Biden’s de-carbonisation agenda and the future outlook for the plan. Biden’s promise to reduce US emissions by 51% from the 2005 baseline is ambitious, but it depends almost entirely on enactment of the Triple-B plan.  About one third of the $1.75 trillion spending plan, or $555 billion, is climate or decarbonization related. For ESG investors, the core focus is about $200 billion worth of clean energy tax credits which have mostly a ten-year duration.  These have a supply-side focus and will drive zero-carbon energy into the US energy mix.  But they are in effect the whole of the plan. The  US will not see binding targets or carbon pricing on the demand until after the 2024 election cycle at the earliest.   James noted that Biden’s top priority is getting the Build Back Better agenda through Congress by Christmas, as the next opportunity to find a stopping point wouldn’t be until February or perhaps later. With regards to inflation, the next monthly report will be politically significant, James said, especially if the number expected on December 10 came in at over last month’s 6.2%, (which it did, at 6.8%.) An accelerating pace of inflation allows moderate Democrats to call for a slower pace and reduced size in Triple B. Inflation also negatively impacts the President’s approval rating,  with Biden’s current approval tumbling since August and adding to heightened anxiety for the passage of Triple B and the midterm elections.

Kim Monk went into detail on Health Care, and the $300 billion worth of Health Care expansion from the BBB plan, which includes expanding Medicaid, a new Medicare hearing benefit and removing the drug pricing overhang. The Democrats will continue to campaign on direct negotiation to expand the number of drugs under this policy, however with Republicans projected to at least take the House in the midterms, Kim suggests a pause for a few years. The drug pricing issue 340B was discussed, which requires certain US drug manufacturers to offer steep discounts to hospitals, however the program has grown out of control and Congress will need to resolve the dispute as a 2022/23 issue. Lastly, on Medicare MCO there is still risk if additional cuts to BBB take place, as well as longer term risks from CMS around the looming Medicare insolvency scheduled for 2026.

Rob Smith also discussed Health Care issues. Drug pricing legislation passing as part of BBB will help to remove some of the pharma sector regulatory overhang regarding potential payment demonstrations that the Biden Administration may pursue. On dialysis, most of the reimbursement risk from the 2010s has likely passed, with Congress and CMS not pressing needs for payment cuts or big time reforms. Overall, however, providers will still face risk heading into 2022 due to the expiration of several temporary reimbursement patches and as the projected 2026 Medicare trust fund insolvency date approaches. 

Ian Katz began on the Fed, who will discuss next week whether to speed up the tapering of asset purchases, which Powell has suggested is likely. M&A applications will face scrutiny and move slowly through the rest of Biden’s term. Skepticism towards fintech and crypto firms has also increased. The process for fintechs receiving a banking charter has stalled and crypto firms will be pushed to give more information about their activities. On equity market structure, the SEC is likely to discourage payment for order flow to make it less attractive. Lastly on climate risk, the SEC is working on a set of rules for climate risk disclosures for all publicly traded companies, by early next year.

Robert discussed Big Tech, looking at the US Federal Trade Commission and their efforts to redefine the practice of antitrust and consumer protection. BBB would give the FTC $1 billion to enhance their privacy and antitrust work, which will result in increased litigation and regulation. Overall, the FTC wants to take advantage of vague statutes and undefined provisions.

Lastly, Byron spoke about defence, where most Europe and US stocks have lagged their broad sector indices, as there has been a reset in consensus expectations particularly in October earnings quarter, as well as other lags including pandemic supply chain issues. On industrials and infrastructure, upcoming legislation for manufacturing and workforce training will be important for defence and on major trade issues, Byron does not expect major change in the administration’s policy, expecting a status quo on US-China trade issues.

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