• Pierre Fournier

The COVID-19 vaccine is a Game Changer for Economies, Markets and Investors

By: Prof. Pierre Fournier

With two vaccines now showing efficacy at 90%+ and health officials rushing to approve them, the vaccination process is set to commence before the end of the year. This vaccine optimism is more than offsetting the very grim near-term transmission/mitigation landscape as cases spike and governments take further action to curb the virus spread.

The announcement seemed to confirm that throwing billions of dollars of public and private money at vaccine development and purchasing contracts was a brilliant strategy. The U.S. government’s Operation Warp Speed alone doled out more than $10-billion to Big Pharma’s vaccine moonshot.

Pfizer and Moderna are likely to be the first companies to see their respective vaccines authorized in the United States. Pfizer is a multinational pharmaceutical giant, while Moderna is a small biotechnology company. Both companies have accepted Operation Warp Speed funding in exchange for a promise that the first 100 million doses of their respective vaccines will be delivered to the U.S. government.

The United Kingdom has become the first country to approve a COVID-19 vaccine that has been tested in a large clinical trial. On December 2nd, UK regulators granted emergency use authorization to a vaccine from drug firms Pfizer and BioNTech. British front-line health-care workers as well as care-home staff and residents could receive their first doses.

Enthusiasm for the Pfizer/BioNTech vaccine is tempered by logistical challenges. It requires two doses to be administered three weeks apart. It also needs to be stored in dry ice to ensure a temperature of minus 70 degrees Celsius (-94 F) or below, which poses a challenge for governments considering rolling it out, particularly for developing countries and those in temperate regions.

Quebec announces COVID-19 vaccination plan

A vaccination program could begin in the province. With a vaccine approval likely days away, Canada is due to receive a delivery of 249,000 doses of the vaccine by the end of the year. Quebec will get roughly 56,000 of those doses. Since two doses are required for immunity to take effect, that means up to 28,000 people will be covered in the first delivery.

Good for the economy

The news that Pfizer and Moderna could secure authorization for a coronavirus vaccine in a matter of weeks has sparked hopes that the global economy could bounce back strongly next year.

The manufacturing capacity and the distribution of the vaccine will not be in place to save the winter in the Northern Hemisphere. Social distancing and lockdown measures will likely stay in place for now, capping economic growth in the economically important Q4 2020 and possibly in Q1 2021. But the Pfizer and Moderna data brings forward the possibility of a better outlook for economic growth in 2021 for several reasons. As such, it is undeniably good news.

The availability of a vaccine and the success of its technology likely reduces the risk of a potential third wave in summer 2021. Knowing there is an end to the crisis in sight, some governments could opt to give more generous fiscal relief than they would have otherwise. A vaccine also helps investors look through the COVID-19 valley and focus more confidently on the recovery and on the post-pandemic world.

A period of consolidation

The S&P 500’s move camouflages an aggressive rotation in equity markets. Momentum strategies, in which investors buy securities when their prices have been rising and sell those when they have been declining, had one of their worst performances since 2009. The FAANGs (Facebook, Amazon, Apple, Netflix, and Google parent Alphabet), which have led market gains since March, also retreated abruptly. These technology companies’ business models have thrived in the COVID-19 era, with their stocks being widely perceived by market participants as defensive investments in these difficult times.

For investors, the question is whether these aggressive one-day moves herald a broader, more sustained rotation towards cyclical positions. To be fair, they were probably also a function of crowded positions, i.e. investors all chasing similar themes and being heavy in certain sectors (such as the FAANG group with their resilient business models for the current environment) while avoiding others (like the Energy sector due to the sharp fall in oil prices and banks due to ultralow interest rates). The aggressive market rotation also facilitated a record valuation differential between growth and value stocks. Struggling Financials and Energy stocks roared upwards.

For now, I believe it is reasonable to expect a period of consolidation for equities following the sharp gains since the U.S. elections and vaccine news. Moreover, the global economy is not out of the woods yet. Investors may start to ponder the logistical challenges of rolling out vaccines globally.

Traders also cheered the increasing political clarity after General Services Administration told President-elect Joe Biden that the Trump administration is making federal resources available for his transition into office. Meanwhile, Biden will nominate former Federal Reserve Chair Janet Yellen to be Treasury Secretary. Many view Yellen as a market-friendly pick considering she oversaw a long economic expansion with historically low-interest rates and is likely to push for further fiscal stimulus.

Investors should use this time to consider their portfolios’ exposure to cyclicality or to economically-sensitive stocks. The possibility of viable vaccines should enable investors to look through the crisis and assess companies that were most affected by COVID-19 on the basis of normalised earnings. Many of these companies’ stocks will appear undervalued, in my view. I recommend adding some exposure to cyclicals and to value stocks to take advantage of the improvement in economic conditions that COVID-19 vaccines could likely bring.

Disclaimer: This article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making and investment based on your own personal circumstances.

Sources: BNNBloomberg, Reuters, The Economist, Les Affaires, La Presse.

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