Wellesley WeeklyWatch – A light at the end of the tunnel? The effects of vaccine news amidst continuing US election and Brexit uncertainty.
17 November 2020
After the participation of six countries and 44,000 trial participants, the Pfizer vaccine’s 90% effectivity rate was promising news in their press release last week. The US drug giant announced the strong results of its late-stage trial of its COVID-19 vaccine, being co-produced with Germany’s BioNTech on Monday.
For the first time since March, investors saw a hopeful, and near, path to normality – one that fuelled a rally in many risk assets.
And yesterday’s news of Moderna’s vaccine with 94.5% efficacy only added to the encouragement.
“The uncertainty that has plagued us through most of 2020 has dramatically declined,” said Johanna Kyrklund, Chief Investment Officer at Schroders and manager of the St. James’s Place Managed Growth fund.
Last week’s market optimism wasn’t universally felt, however, and the most striking feature of the rally was the divergence between stocks that performed well and those that lagged. Those who have struggled throughout the pandemic, for example – the hospitality and travel sectors – enjoyed a return to good fortune. Cruise-ship operator Carnival Corp’s shares ended 39% up over the day on Monday, and British Airways owner IAG saw a rise of over 40% in its share price throughout the week.
Companies that have benefitted from more people working from home were among those who suffered declining share prices. Some of these included high-flying technology companies whose revenues have grown during 2020 thanks to more people shopping online and working from home.
The vaccine optimism dampened somewhat towards the end of the week, due to evidence that COVID-19 cases are still on the rise in many areas. Friday saw the US, for example, reach their highest case level yet – 184,000 per day.
Similar peaks and troughs could be seen during this week as markets react to the news of Moderna’s vaccine trials.
Even in a best-case scenario, however, it’s important to remember that widespread adoption of a successful vaccine is still some way off, says AXA Investment Management, a fund manager for St. James’s Place: “Even with a successful vaccine , a mass roll-out will face logistical challenges and could take longer than the market is expecting.”
Capital Economics suggested that the vaccine is unlikely to boost economic activity until next year, adding that given the breakthrough has led to “light at the end of the tunnel” and a belief that the virus can soon be controlled, it might encourage countries to impose more intense lockdowns in the meantime.
So the wise investor’s stance is probably one of cautious optimism, even though last week’s announcement is undeniably good news.
How should investors act now?
After last week’s events, some market observers are arguing that we’re at the start of a major market ‘rotation’, which means previously out-of-favour sectors begin to have their time in the sun. This scenario would mean that fast-growing technology stocks, as well as other strong performers during the pandemic, would now begin to lag behind stocks that benefit more directly from economic recovery like banks and energy companies.
While this may indeed be the case, it is incredibly difficult for investors to time such an event, so the best course of action right now would be to maintain a diverse portfolio that includes assets on both sides of the rotation, according to Gavin McGhee, Wealth Management Consultant at St. James’s Place.
He adds: “You can’t rely on one particular investment style, sector or market continuing to be the flavour of the month.”
Investors should therefore resist the urge to change their approach based on major announcements such as Pfizer or Moderna’s. A benefit of diversification is that it protects against a portfolio’s reliance on or susceptibility to any single event.
“As fund managers we like to pretend that we have a crystal ball, but 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,” adds Schroders’ Johanna Kyrklund.
The bigger picture
And putting aside COVID-19, there are plenty of other potential sources for uncertainty ahead.
The ban that the US issued on Friday on American investors owning shares in Chinese firms suspected of having links to the country’s military reminds investors of the strained relationship between the two countries; the share prices of some of the Chinese companies named in the order subsequently dropped.
And while the US election is now behind us, there are still political risks to be found in Washington. The Trump campaign’s legal challenges to the result of the election provides one source for concern as, even if they provide little material impact of the transfer of power, they could make for a current administration that’s less focused on passing a new fiscal stimulus package.
Finally, Brexit trade deal talks are approaching their final stage – although there is still little to show for it despite UK chief negotiator David Frost saying there has been progress in recent days. According to Ireland’s foreign minister, the two sides must make progess this week if a deal is to be successful.
The first of two reports reviewing Capital Gains Tax (CGT), as requested by Chancellor Rishi Sunak in July, has been published by the Office of Tax Simplification (OTS). It suggests that the current rules can “distort” investor behaviour and makes several recommendations including a cut in the annual allowance and better alignment of tax rates on capital gains and income.
The unusual speed of production of the 136-page report adds weight to the view that the government is keen to find ways to fill the huge hole COVID-19 has caused in its finances. The reforms suggested could generate revenue of £14 billion in the first year, although OTS stated that this figure could be much lower if the proposals prompted a change in taxpayers’ behaviour, as they almost certainly would.
One key recommendation relevant to investors is to charge capital gains at Income Tax rates, which would effectively double them from their current level. Another pertinent idea is to reduce the current annual exempt amount of £12,300. According to the OTS, to cut around £5,000 would double the number of people paying CGT each year.
Critics have not been silent about the recommendations, which also include scrapping the CGT re-set in the value of assets transferred on death. Owners of small businesses could also be vulnerable to proposals to review business assets disposal relief and to apply tax to cash built up inside a company.
Around 250,000 individuals currently pay CGT1, suggesting that reforms to CGT won’t affect the majority of taxpayers. Nonetheless, it won’t have escaped the chancellor’s notice that most of any extra tax burden is likely to fall on core Tory voters.
“Some of the recommendations are relatively radical, but they are not official policy, so it doesn’t make sense for individuals to change their financial plans at this stage,” suggests Tony Wickenden, Technical Business Development Director at St. James’s Place. “We may hear more about the government’s plans for capital taxes in next year’s Budget. But this review underlines the importance of making the most of appropriate tax wrappers such as ISAs and pensions that shelter your assets from CGT, and any further liability to Income Tax.”
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1Gov.uk, November 2020
In the Picture
Some technology stocks fell after news of a vaccine emerged last week, in a reversal of a pandemic-related trend. Last week the Nasdaq-100 index, which is more heavily skewed towards big technology names, lost its lead over the S&P 500 index, which includes a broader range of US equities.
Source: Financial Express; data shown for Total Return indices. Past performance is not indicative of future performance.
The Last Word
“Today is a great day for science and humanity”
– Albert Bourla, Pfizer’s chairman and chief executive.
Axa and Schroders are fund managers for St. James’s Place.
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