Investors right to be more enthusiastic about the future
Investors have just seen the wildest day for markets in a very long time thanks to encouraging news about a Covid-19 vaccine. Many people have taken the view that we now have a fix for the coronavirus crisis and a panacea for the global economy.
We are certainly more enthusiastic about the outlook and this is a major step forward for markets and society. Yet it is important to appreciate that markets could still be influenced by other factors and that includes ones that could weigh on share prices.
The latest results from the vaccine being developed by US pharmaceutical giant Pfizer and Germany’s BioNTech have completely surpassed expectations. At 90%, the reported efficacy against the virus is well above the 50% threshold required for a vaccine to be approved.
And the apparent success of this vaccine, which in fairness is yet to be fully signed off by regulators, is an encouraging sign for the other vaccine developments following in its wake.
No doubt there will be challenges with distribution but the market reaction to date is probably just a hint of what will happen if or when Covid-19 vaccines start getting rolled out at scale.
In this sense the market’s response on 9 November was rational, even if it may have overshot slightly. In the words of Alastair George, chief investment strategist at research firm Edison: ‘While it will still be some time before social restrictions can be lifted, investors are skipping to the end of the pandemic movie.
‘With a favourable climax to the US presidential election behind us, 2020’s risks have diminished significantly. In our view, the market rally is firmly backed by the rapidly improving outlook for 2021.’
Investors should still consider a downside scenario. Certainly, the victory for president-elect Joe Biden is seen as market-friendly, particularly given the likely constraints placed on an agenda of corporate tax increases and regulation by a Republican senate.
However, if Donald Trump’s challenge of the result escalates and/or he pursues some kind of scorched earth policy in the White House prior to his departure it could be a source of considerable uncertainty and turmoil in the US at least until inauguration day on 20 January 2021.
Also, there are still no guarantees on a vaccine which should probably be a big weapon in the arsenal in the fight against coronavirus rather than a silver bullet.
A notable feature of the reaction to the latest vaccine developments has been a shift away from growth towards value and a rotation out of lockdown victors into lockdown victims, and so investors could have seen parts of their portfolio fall in value during the recent market surge if they owned these lockdown winners.
This should not alarm people invested in the shift towards a digital economy. There is a distinction to be drawn between businesses for whom the Covid-19 crisis provided a one-off boost – for example, companies in the testing arena – and those for whom the pandemic accelerated existing trends.
Growth in online shopping, for one, may slow but is not going to disappear just because we have the promise of a potential return to normality. This will be a ‘new normal’ not a pre-Covid landscape.