Vaccine stocks and safe haven assets gain during equity market correction

The spread of the coronavirus outside of China, including other regions in Asia and Europe most especially in Italy, has led the global economic outlook to deteriorate sharply and pushed key global equity market indices in correction territory. An equity market correction is defined as a decline greater than 10 per cent from its recent peak. Meanwhile, benefitting from the short term bearish sentiment are drug makers that are expected to profit from developing a treatment for the covid-19. Biotech companies which are in the race for developing a vaccine to beat the virus have managed to escape the market sell-off and locked in a positive return year to date. On an asset class basis, safe haven assets such as sovereign debt have also sheltered investment returns during this period of heightened market volatility.

Currently there is no approved vaccine that can prevent the coronavirus disease and no specific antiviral treatment or cure. However, a number of drug makers have announced their plans to develop treatments or partner up with government agencies. Sanofi and Johnson & Johnson both announced their collaboration with the Biomedical Advanced Research and Development Authority to expedite a potential vaccine. Case in point, Sanofi Pasteur, which is the vaccines global business unit of pharmaceutical company Sanofi, announced its use of a pre-clinical SARS vaccine candidate to potentially help fight against this outbreak.

However, investors have favoured biotech companies that are more advanced in the search for a treatment. The share price of vaccine developer Novavax more than doubled on its announcement that it is in the process of identifying optimal candidates for human testing, in its efforts to develop a vaccine to protect against the coronavirus disease. Start-up company Moderna is up by approximately 30 per cent on a year-to-date basis, as the US biotech firm announced the shipment of an experimental coronavirus vaccine to the US National Institute of Health, with trials expected to start in April. 

Meanwhile, the World Health Organisation has described biotech company Gilead Sciences Inc’s experimental antiviral remdesivir as the most promising candidate. The drug was initially developed to treat other diseases such as the Ebola virus, and is now being tested for the new coronavirus. The share price has gained over 9 per cent over the past month, as the company announced that it is in the testing stage and is expected to enrol 1,000 patients in two clinical studies starting in March, in order to determine the safety and efficacy of the drug as a potential treatment. 

Despite the faster vaccine development and investor optimism for the biotech firms, there is still a lot of uncertainty before a potential vaccine can be deployed worldwide, including obtaining regulatory approvals and the price point of the drug. 

Evidently, the bearish market sentiment is supported by the increasing risk of more areas to be quarantined as governments struggle to contain the spread of the outbreak outside of China. As a result, a defensive allocation including safe haven assets and a higher cash allocation is more prudent in the short term. Sovereign bond yields are currently trading at historic lows, with the US 10 year Treasury inching close to one per cent for the first time and the 10 year German Bund trading in the region of a negative 0.65 per cent; both reflecting further monetary policy action from central banks. However, despite that short term outlook has turned bearish, it is still clear that the impact of the outbreak on economic growth is still uncertain, depending mainly on how long it will take to be contained and the expected subsequent policy action, both from the monetary and fiscal front. 

Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.