Vaccines – More Cummings than Goings

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The rally in equities continued last week with global equities gaining 2.5% and breaking through their all-time highs earlier in the year. Equities are up a further 1.5-2.0% today.

The reason for the rally is simple – the recent vaccine news. Last week, Pfizer announced its vaccine is 90% effective in preventing Covid infections and Moderna reported today that its product is 94.5% effective. These levels of efficacy are considerably higher than had been expected.

It now seems very likely that vaccines will start to be rolled out early next year if not before. Logistical challenges of a mass roll-out will be significant, not least with the Pfizer vaccine requiring ultra-cold storage and both vaccines requiring two doses. Mass innoculation therefore looks unlikely before next summer. There is also the additional complication that while 80% of the population is supposedly willing to be innoculated in the UK, it is no more than 60% or so in the US.

Even so, the vaccine news is very significant and means there is now clear light at the end of the Covid tunnel. Near term of course, the picture is not half so reassuring. Infections have fallen back somewhat in Europe just recently but have picked up again in the UK and are still heading higher fast in the US. The UK and European economies now face a double-dip recession in the fourth quarter as a result of the lockdowns and the recovery could also falter in the US as renewed social distancing measures are imposed.

But markets are forward looking. The prospect is now for a strong recovery next year, buoyed by pent-up demand as consumers cheer up and spend some of the savings built up earlier this year. If the sunlit uplands are visible on the horizon, investors are usually prepared to look through any short-term troubles. This was the case in March when the massive policy stimulus fuelled the sharp rally even while we were still in a deep recession. The same is true now.

While equities near term may have little scope for further gains following their bounce, they do have further upside next year. Indeed, return prospects look significantly higher for stocks than bonds, where returns are likely to be very limited.

The vaccine news not only triggered a rally in equities generally but also a rotation out of the areas which have excelled this year (such as tech stocks) into the distinct underperformers. Financials bounced strongly last week as did to a lesser extent industrials. This move into the cheaper and more cyclical areas of the markets very likely has further to run over coming months given the extent of their underperformance of late and expectations for a strong economic recovery next year.

The UK was also a notable outperformer last week, gaining 7% and reversing part of the marked underperformance seen so far this year. This occurred even as the latest GDP data confirmed that the UK economy has been hit considerably harder by the pandemic than most others. Whereas GDP in most other Western economies was 4-5% lower in Q3 than at the end of last year, UK GDP was down close to 10%. Only Spain fared as badly.

Last week’s bounce in UK equities also coincided with the comings and goings at 10 Downing St. But rather than representing a sigh of relief at the prospect of more harmony at the top and possibly a more conciliatory approach to Brexit, it much more likely just reflects the general move into the most beaten-up markets. At their current very cheap valuations, UK equities do not need much to go right in order to see a period of outperformance.

Rupert Thompson

Chief Investment Officer