The result of the US election was big news for the world, for the economy and markets. But as an investor I’ve always considered the pandemic of far greater consequence.
Joe Biden’s electoral success was duly eclipsed by the news on Monday that an effective Covid-19 vaccine may have been found.
An eventful week suddenly took on even greater significance. Indeed, the CEO of Pfizer – the firm which has developed the vaccine (alongside BioNTech) – hailed it as “a great day for science and humanity”.
Whether this turns out to be hyperbole remains to be seen, but the results certainly appear hugely encouraging, with the new two-dose vaccine said to be more than 90% effective in preventing Covid-19. To put this in context, the widely-used measles vaccine is 97% effective and the seasonal flu vaccination is between 40% and 60% effective.
The prospect of a possible return to normality got investors understandably excited, with stock markets around the world surging. In the UK the FTSE 100 rose nearly 5%, for example.
What was particularly notable was the shares that outperformed. Those companies which have been beaten down hardest by lockdowns – such as airlines, leisure and hospitality – surged dramatically.
At the same time, government bond yields rose, the price of gold fell and oil rallied sharply.
Is this the start of a major rotation? Quite possibly. We may finally have found the catalyst to spark a move away from the “stay-at-home” stocks that have benefited from lockdown, towards recovery stocks.
There would no longer be a need to pay a large premium for the few areas for growth, if all sorts of companies return to growth as the economy recovers.
This comes down to being prepared for different eventualities. Although as fund managers we like to pretend that we have a crystal ball, in reality to build a portfolio you need to consider a range of potential scenarios. You seek to make investments that can cope with multiple outcomes.
The global pandemic created a major challenge on this front, as suddenly the range of possible outcomes became very extreme. Letters to describe the potential economic recovery from the virus included U, V, W, L and K.
Even if you were optimistic and expected a sharp V-shaped recovery, you still had to ascribe some probability to it being an “L”- shape, where the absence of a vaccine resulted in more medium-term damage to the private sector.
Monday’s news from Pfizer, combined with medical advances that make the virus more treatable, mean that the probability of an L-shaped recovery has been significantly reduced.
The potential vaccine also reduces the risks associated with politicians and their success in propping up their respective economies or controlling the virus. Looking ahead over the next six to 12 months, Monday’s news makes it less likely that we will need fiscal stimulus to plug the demand gap associated with potential lockdowns.
We were already of the view that Covid-19 outcomes were more important than the US election and the news of the last few days just confirms this. The most extreme electoral outcomes (a “blue wave” or a contested election) were avoided and now they matter less in any case.
Compared to the start of last week, the uncertainty that has plagued us through most of 2020 has dramatically declined.
Suddenly there is cause for optimism for 2021; let’s hope yesterday turns out in hindsight to be as great a day as Pfizer’s CEO proclaimed.
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