How Biden’s $1.9T Spending Package Will Affect You

The stock market in both Hong Kong and the USA have rebounded to new highs from the March 2020 crash. Today (January 20, 2021), The Hang Seng Index of Hong Kong closed at a record high of 29,962 mirroring the four major US indices that have hit record highs.

Why the fast rebound?

The US central bank, The Federal Reserve, carried out large scale quantitative easing and lowered savings rates to provide liquidity to the market. As a result, money has continued to be poured into the stock market. The debt on the Fed’s balance sheet has soared to US$7 trillion after it was originally US$4 trillion pre-pandemic.

As Biden is officially sworn in today – January 20, 2021, he will continue to make the economy his top priority. Last week, Biden announced that he would launch a rescue package worth US$1.9 trillion. Part of that package will flow to individual US citizens as stimulus checks, many who will use it to invest in the stock market like they did in 2020. Therefore, we may continue to see a rise in the markets in 2021.

Outside of stocks, gold has been popular with investors as a safe-haven. The price of gold (XAU) has risen and held its price at about US$1,800 per ounce.

For further diversification, many investors look toward the property market as a safe asset. Let’s compare gold prices with property prices in the past 10 years – gold prices is currently sitting at its high from 10 years ago while property prices in tier 1, like London / Hong Kong / New York City, global cities have consistently risen.

How have real estate prices been able to consistently rise?

It is because the residential market is composed of mostly owner-occupied homes which creates limited supply while demand is strong due to new buyers and a growing population.

Second, the low vacancy rate in tier 1 cities create consistent cash flow and therefore, attract investments from investors. 

Finally, the current low-interest environment enables an investor to make use of leverage through large mortgages. 

Let’s look at London – the vacancy rate is 1% in a market where properties appreciate at 3% annually. A mortgage can be obtained at about 65% LTV at an interest rate of 2.2% from a Hong Kong based lender.

Manchester has also emerged in recent years as a strong real estate market. Price appreciation will be lower than London but rental properties have a higher yield.

In the short run, the US will likely maintain its quantitative easing policy and its low interest rates. If the Biden administration continues this, expect to see a depreciation of the USD. Since the HKD is pegged to the USD, it will also depreciate against other currencies. Therefore, an opportunity exists right now to invest in overseas assets to hedge against future exchange rate declines.

In the long run, quantitative easing and low interest rates will lead to a decline in your purchasing power as the price of assets rise. Therefore, it would be wise to look ahead and invest in assets yourself to boost your returns and to prevent your bank deposits from declining in purchasing power.

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