It’s been a winter of discontent for investors, with a turbulent US election, more missed Brexit deadlines and the second wave of COVID-19 to contend with. So, it was very welcome news indeed on 9 November when Pfizer and BioNTech announced that their vaccine was 90% effective against the virus.
Since then, Moderna have also publicised a successful vaccine (with 94.5% efficacy), with others hot on their heels – including one being manufactured by AstraZeneca in Oxford, which is showing promising immune responses in older people. The speed of the creation of these vaccines is unprecedented – the process typically takes years.
In their press release, Pfizer and BioNTech described the results of their vaccine as a “great day for science and humanity” – but the question on investors’ lips is: will it mark a turning point for the economy, too?
Indeed, the world has been eagerly awaiting such an announcement – and, while investors can now see a path to normality that looks a little clearer, what does it mean for their long-term strategies? And what about business owners, who have gone through the phrase of survival and are now looking to thrive in 2021?
A welcome boost
The reactions to Pfizer’s announcement were immediate – economic forecasts were upgraded, many risk assets saw rallies, and there have been a series of successive daily gains on the FTSE 100. Following Moderna’s announcement on 16 November, the FTSE 100 surged 104.9 points to its highest levels since June.1 On the same day, a flurry of global takeover deals added to the excitement, with $40 billion of deals being announced.2
Shares in the businesses most affected by social distancing, such as those in the hospitality and travel sectors, finally enjoyed some time in the sun. British Airways owner IAG, which had been struggling, saw its share price rocket by 40% throughout the week following Pfizer’s announcement.
Hande Küçük, Deputy Director of Macroeconomic Modelling and Forecasting at the National Institute for Economic and Social Research (NIESR), told the Guardian:
“The economic impact of COVID-19 not only comes from lockdowns and restrictions but from voluntary social distancing. If vaccines reduce the fear of being infected it might have a big impact on the recovery.”3
A reverse in fortunes?
Some market observers are now arguing that we’re at the start of a major market ‘rotation’, where out-of-favour sectors take a larger share of the good fortune.
In this scenario, strong performers during the pandemic (such as high-flying technology companies whose revenues have grown in 2020 thanks to more people shopping online and working from home) would begin to lag behind stocks that benefit more directly from economic recovery, such as banks and energy companies – plus the aforementioned hospitality and travel sectors.
This idea was supported by the divergence in how different types of stocks performed following the vaccine news. Some of the “stay-at-home” stocks that have been beneficiaries of the pandemic saw their share prices decline – Zoom, for example, took a heavy hit.
The bigger picture
Although the recent vaccine breakthroughs represent a huge leap in the right direction, it’s important to look at the long-term picture. Even once a successful vaccine has the green light, widespread adoption is some way off. A mass rollout will face logistical challenges and could take longer than the market is expecting.
It will also take some time to recover from the wounds COVID-19 has inflicted on the global economy. Estimates from the International Monetary Fund (IMF) projected the global economy to shrink 4.4% for 2020 – the worst performance since the Great Depression in the 1930s.4 Many world leaders have also downplayed the possibility of an immediate change to economic forecasts.
The spread of the virus is still weighing on markets – in mid-November, enthusiasm about the vaccines was dampened by evidence that COVID-19 cases were still on the rise in many areas. In the US, for example, new cases reached a record high at 184,000 per day – perhaps aptly on Friday 13th.
How should investors react?
While encouraging, Capital Economics believes the vaccine is unlikely to boost economic activity until next year. So, even though last week’s announcement is undeniably positive news, the best stance for investors to adopt is probably one of cautious optimism.
There might well be a major market rotation – but given how difficult it is to time such an event, the best course of action is to maintain a diversified set of investments that includes assets on both sides of the rotation.
Investors should therefore resist the urge to change their approach on the back of major vaccine announcements like Pfizer or Moderna’s. One of the benefits of diversification is that it ensures portfolios aren’t too reliant on, or susceptible to, any single event. This approach will also help you ride out any short-term peaks and troughs.
A financial adviser can help you ensure you have a diversified portfolio, and can give you advice on when is best to ‘sit tight’ through periods of volatility.
Schroders’ Johanna Kyrklund comments:
“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.”
And as for investing in pharmaceutical companies or ‘reopening sectors’, it is worth taking professional advice. Pharmaceutical stocks, for example, can expect a short-term boost. But in the long-term, investors need to look at the value and cashflow over time – for example, whether the vaccine will be a one-off or whether we will need a vaccine booster every year, like the flu jab.
Should business owners change their strategies?
The vaccine news will have no doubt been met with optimism from many companies, which have confronted several challenges during the pandemic, and are now facing the prospect of the end of the furlough scheme and certain tax breaks on 31 March 2021.
Some experts believe this vaccine news will encourage governments to keep such support in place, now that the end of coronavirus’s rampage is in sight. The importance of preventing job losses and bankruptcies was again highlighted this month – on 19 November, the ONS revealed that one in seven UK companies fear they will not last until next spring, with hospitality firms particularly worried.5
On the flip side of the coin, for companies in a strong position, now might be the perfect time to invest in your business. As we saw, $40 billion of deals were announced on 16th November, showing company bosses’ confidence in the future. What’s more, the Bank of England Chief Economist, Andy Haldane, is urging entrepreneurs to invest in their businesses now to be in a strong position for when the COVID-19 crisis passes – he recently argued in The Times that it is counter-productive for business leaders to hold back on investing in their enterprises.
To conclude, then, it’s clear there has been a huge change in outlook since the news of at least two successful vaccine candidates, bolstering optimism for the revival of global economic health – and, in short, better times!
When it comes to investment, we’d recommend an approach of ‘cautious optimism’ and maintaining a long-term view with a diversified portfolio. We’re not out of the woods yet, so it’s important to not make any hasty decisions, and to shelter your investments from any market turbulence created by COVID-19 (or other events).
Similarly, if you’re a business owner who is (understandably) laser-focused on your business, you might not be paying enough attention to your own finances – and might therefore be in need of a review to ensure your portfolio is protected from any volatility. When it comes to your business, it is worth keeping an eye of the government’s moves, for example, whether they extend any support schemes following the vaccine news. It might also be the time to start investing in the future – once again, a professional adviser can help your plan ahead!
If you have a question about what a coronavirus vaccine could mean for your investments or business, or would like more information about our services, get in touch today on 01444 244551.
5ONS, 19 November 2020
The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.