Over the past few weeks, news from two vaccine developers dominated movements on international financial markets. On November 9, Pfizer and BioNTech announced that their COVID-19 vaccine was more than 90 per cent effective in preventing the infectious disease. The following Monday, the biotech company Moderna revealed that in a late-stage clinical trial, its coronavirus vaccine was found to be 94.5 per cent effective.
These two announcements fuelled optimism that the pandemic could end sooner rather than later, leading to sharp rises in the main international stock markets. The S&P 500 and the Dow Jones Industrial Average added 3.35 per cent and 5.74 per cent respectively between November 9 and 16. In Europe, the gains were more remarkable as the FTSE 100 and the Euro Stoxx 50 both surged by more than eight per cent.
Interestingly the tech-heavy US Nasdaq Composite index underperformed considerably during the same period as it ‘only’ advanced 0.24 per cent. The good news of the upcoming vaccines triggered a rotation away from companies that were beneficiaries during the pandemic (such as Zoom, Netflix and Peloton) towards companies in economically sensitive sectors (cyclical) that stand to benefit the most when life returns to a form of normality once the pandemic is brought under control. The share prices of companies in sectors such as hospitality, airlines and restaurants dropped heavily earlier this year as the World Health Organisation declared COVID-19 as a pandemic, and their revenue generation came to an almost abrupt halt.
Although many commentators pointed out the potential difficulties to ensure widespread distribution of the Pfizer/BioNTech vaccine due to the requirement for storage at very low temperatures, Moderna’s vaccine can be stored at much higher temperatures for up to 30 days, raising hopes of achieving a more effective distribution globally. Moderna reported last week that it intends to submit its vaccine for approval by the US Food and Drug Administration “in the coming weeks”, raising the prospect that at least two vaccines will be approved before the end of 2020. On November 18, Pfizer confirmed that the final data analysis shows that its vaccine is 95 per cent effective, and on November 20, it submitted an application for emergency use authorisation to the Food and Drug Administration in the US.
It is thus clearly evident that both effective vaccines as well as successful treatments against COVID-19 (from the US companies Regeneron and Eli Lilly) will be available in the following months.
The vaccine developers also indicated a significant ramp-up in production through 2021 which will help achieve widespread distribution from mid-2021.
Meanwhile, due to the significant spike in COVID-19 cases in most parts of the world and renewed lockdown measures in many EU countries and in several US states, the near-term economic performance will be very weak once again. But most international commentators do not expect global economic performance to be as bleak as that experienced at the onset of COVID-19 in Q2, 2020.
Financial analysts claim that various economic indicators (such as manufacturing, housing and consumer spending) point to the onset of a new upward cycle, which is very encouraging and could lead to fresh economic vigour once conditions around the world normalise.
Uncertainty has clearly abated since early November after the outcome of the US presidential election and the news from the vaccine developers indicating that approval of a vaccine is imminent.
Other vaccine candidates are also likely to edge closer to approval. One of the main contenders, AstraZeneca (in tandem with the University of Oxford), started stage three trials several weeks ago. AstraZeneca last Monday announced it achieved positive high-level results from an interim analysis of clinical trials which showed that the vaccine was highly effective in preventing COVID-19, the primary endpoint, and no hospitalisations or severe cases of the disease were reported in participants receiving the vaccine. Moreover, a new fiscal stimulus package in the US can also accelerate the economic recovery in 2021. As a result of all these factors, one of the large investment banks in Europe claimed that the S&P 500 is anticipated to climb 13 per cent in 2021.
Investors are seeing light at the end of the tunnel and positioning for a full reopening
Other commentators believe EU and UK equity markets could outperform the S&P 500 due to their lower exposure to technology companies compared to the S&P 500, which has a weighting of over 25 per cent towards technology companies. The latter saw their share prices rally for most of the year as many benefitted from the ‘stay at home’ trade with the result that most are trading on very high valuation multiples. For example, Apple’s share price rallied by 60 per cent since January (and by 120 per cent since the low for the year on March 23), pushing its price to earnings multiple to circa 36 times. Likewise, Amazon surged 68 per cent, while Microsoft climbed by more than 30 per cent.
There were significant movements across international financial markets in recent months as investors digested the previously unimaginable change in circumstances and lifestyles as a result of COVID-19. To cite a few examples, the share price of BMW dropped from €74 in early January 2020 to a low of €36.60 in mid-March but has since doubled and recovered all of the losses incurred in Q1, 2020. Likewise, the Spanish company Inditex, which is one of the largest retailers in the world and owner of the hugely popular Zara brand, saw its share price drop by over 30 per cent within a few weeks in Q1, 2020, but has since recovered by 35 per cent and is now just 12 per cent below the pre-COVID share price. There was a very similar trend in share prices of most companies within economically-sensitive sectors.
Companies in other sectors such as oil and gas, energy, airlines and cruise liner operators have also recovered substantial ground and, in most cases, are well above their lows recorded earlier this year as markets started to anticipate a return to normality.
On the other hand, the share prices of companies that have benefitted from people spending more time at home during the pandemic had a stellar performance for most of 2020, which led to a surge in the Nasdaq index in the US and also the S&P 500 due to its high weighting to technology, leading to a false belief that most stock markets rallied during the pandemic. The share prices of these companies, however, are now retreating as investors are seeing light at the end of the tunnel and positioning themselves for a full reopening of the global economy following the encouraging news from the vaccine candidates.
As I had indicated in some previous articles, the mood of Mr Market fluctuates from one extreme to another, and when confidence falls, share prices generally drop heavily. Likewise, when sentiment is euphoric, share prices generally rally.
Investors should continue to look at investments in equities from a perspective of owners of businesses. For most companies, with the exception of the ‘stay-at-home’ stocks, 2020 will undoubtedly be a bad year from a financial perspective, but the pandemic will merely prove to be a temporary hit, albeit with some material repercussions. Over time, as conditions normalise, the profitability of many of these companies will start to recover and, subsequently, the ability to resume dividend payments to shareholders.
The immediate reaction in recent weeks as uncertainty abated indicates that equity markets will continue to price in a gradual economic recovery possibly as from mid-2021. For example, Ryanair last week stated that it aims to deploy airline capacity of between 75 and 80 per cent of its pre-crisis traffic during summer 2021. This could naturally have a strong positive impact across the EU hospitality industry and other sectors dependent on the resumption of air travel.
The stock market is a forward pricing mechanism, and although the next few months will be very tough for people on a personal level due to the need for social distancing and also for companies whose revenues will be depleted due to continued lockdown measures, investors need to look beyond COVID-19 and position their portfolios accordingly.
As highlighted in the past by a UK financial journalist, “perennial pessimism is the easiest way to simulate wisdom about the stock market, but it isn’t the way to make money”.
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