The Covid-19 vaccine announcement | December 2020

 

 

In this episode we discuss the Covid-19 vaccine announcement and whether this stock market strength can endure, particularly in the US, and also the implications for government bond markets.

Vaccine progress has boosted equity markets throughout November, even if there are still logistical challenges. This makes it more likely that global GDP will reach consensus expectations of +5.2% growth in 2021, with less need to implement economically damaging national lockdowns.


[0.19] We’ve had a slew of vaccine announcements in recent weeks and it looks like some return to normality may be possible by Easter of next year. Markets have reacted with enthusiasm – are you equally optimistic?

  • In short, yes. Equities were boosted in early November by vaccine announcements from Pfizer-BioNtech and Moderna
  • given that test results show these vaccines prevent 90-95% of infections, it could potentially be a game changer to break down transmission chains and allow herd immunity to be achieved
  • however, there are huge logistical challenges to vaccinate the global population
  • it is also not clear whether there will be sufficiently strong uptake for a vaccine whose effectiveness and side effects are unknown over the long term.

[2.10] What might be its economic impact?

  • For the economy, the vaccine announcement should increase the probability that consensus 2021 expectations of +5.2% global real GDP growth are met and would be a significant increase from -3.9% estimated for 20201
  • at the very least, the most vulnerable parts of the population can be vaccinated reducing the need for governments to implement economically-damaging national lockdowns
  • the vaccine should also allow pandemic-hit industries, like hospitality, travel and leisure, to slowly recover
  • major central banks are expected to remain dovish on monetary policy and governments supportive from a fiscal point of view
  • for example, central banks have made it clear that low interest rates will remain in place until there are clear signs of a recovery. While fiscal support, such as the furlough scheme will be removed next year, the government is likely to step in again if unemployment rises to unacceptable levels.

[2.10] And is this likely to be positive for equities, on balance?

  • A strengthening and broadening macro backdrop with increased visibility is likely to be positive for global equities
  • the MSCI All Country World equity index has already returned 64% (including dividends) from its low this year on the 23 March2 in anticipation of a strong rebound in 2021 and is already above pre-COVID levels, but we feel there is further to go
  • the improving economic situation is less conducive for long-term government bonds
  • since the recovery in equities this year, total returns for both 10-year UK Gilts and US Treasuries have been flat
  • looking forward, we expect equities to continue to outperform bonds.

[2.57] It looks like we have a winner in the US – what are your initial thoughts on Biden’s victory?

  • Barring Republican lawsuits that substantially change the vote count in key swing states, Joe Biden is heading to the White House on the biggest turnout since 1900
  • however, the new Democrat president will enter office on 20 January with a highly divided country along gender, racial lines, young, old and non-college/college educated lines that has been made worse by the pandemic
  • there is also increasing wealth creation divergence between urban and rural communities
  • data from Brookings, a US-based non-profit public policy organization, found that Joe Biden’s 76m votes came from predominantly densely populated urban areas that account for 70% of GDP, up from 64% under Hilary Clinton in 2016, while Donald Trump’s 71m votes account for 29% of GDP, down from 36% at the last election3
  • while the gap in the popular vote was bigger than four years ago, the presidential race was tighter in the electoral college system; Biden won by 50,000 votes in Wisconsin, Georgia and Arizona, compared to Trump winning by 77,000 votes in Pennsylvania, Wisconsin and Michigan in 20164
  • these small margins of victory, along with the income inequality in the urban-rural areas, probably go some way to explain why the last two elections have been so acrimonious and point to long-term risks in the stability of the country.

[4.40] Is it important that Biden doesn’t look likely to secure a ‘clean sweep’ of Congress, Senate and presidency?

  • Democrats will be disappointed that the “Blue Wave” of winning the White House and control of both houses of Congress predicted by some polls did not materialise
  • in the House of Representatives, Democrats maintained control, but lost seats. However, the Democrats failed to win control of the Senate, where Republicans can now block key parts of Biden’s pre-election agenda, such as raising corporate and capital gains taxes in order to fund fiscal expenditure on health, education and the Green New Deal
  • Senate Republicans are also likely to block appointments of controversial left-wing politicians in a Biden cabinet, like firebrand Bernie Sanders
  • the Democrats do have a second opportunity to gain control of the Senate, if they win the two run-off elections in Georgia on 5 January.

[5.35] What is the investment impact from a Biden presidency?

  • In terms of investment themes, our initial thoughts from a Biden presidency are that;
    • i) A split Congress will be seen as a positive for stocks, since it reduces the risk of corporate tax increases and concerns over potentially business unfriendly ideology from the left of the Democratic party (i.e. restricting share buyback policies and legislation that could strengthen the power of unions);
    • ii) Renewable energy should benefit from the president-elect’s symbolic promise to re-join the 2015 Paris climate accord and use of executive authority to impose greater regulatory pressure on non-renewable energy and emissions.

[6.20] Could a more consensual approach to foreign policy from Biden benefit emerging markets?

  • Emerging Asia should gain from an expected multilateral approach by the US over trade policy, compared to Trump’s policy to impose ad hoc tariffs on China
  • lower protectionism risk should boost global trade and drive down the US dollar
  • export-heavy Emerging Asia is likely to benefit in this environment where a weaker dollar should make it easier for countries like China to service elevated dollar-denominated debts.

[7.05] Big tech has outperformed for so long, but there has been a rebound in some ‘value’ areas in recent weeks. What’s your view on the outlook for the dominant technology names and the US in general?

  • On historical high valuations, the tech sector looks vulnerable to underperform. There is a risk that the new administration looks to rein in monopolistic abuses of Big Tech through greater regulation and antitrust intervention
  • this may suggest switching to equal-weight index funds from tech-heavy cap-weighted indices, and moving into value over tech-heavy growth styles.

[8.08] How should UK equity investors view a Biden Administration?

  • While positive long-term investment themes will provide a tailwind to some areas of the US stock market, we remain cognizant of the risks of political deadlock there
  • on a risk-to-reward basis, we see more opportunities in non-US equities and particularly in the UK, where valuations are less demanding
  • the risk of the UK leaving the EU without a trade deal has probably fallen after the US election
  • Joe Biden has said that his administration will not agree to a trade deal with the UK if the Good Friday Agreement is undermined
  • PM Johnson will not want to risk failing to achieve a trade deal with either the US or the EU, particularly given the economic pressure already faced by the country from the ongoing coronavirus pandemic
  • as such, UK equity investors should view a Biden administration as a positive if it lowers the risk of a no deal Brexit.

 

Sources
1 Bloomberg, data as at 17 November 2020
2 Refinitiv, data as at 25 November 2020
3 Biden-voting counties equal 70% of America’s economy. What does this mean for the nation’s political-economic divide? Mark Muro, Eli Byerly Duke, Yang You, and Robert Maxim, 10 November 2020
4 There’s a strategy behind Trump’s sulking, Gerard Baker, The Times, 12 November 2020

 

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This episode was recorded on  26/11/2020

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Podcast information:

The Pulse from Smith & Williamson

Investment Show: The Covid-19 vaccine announcement

Episode 16

Broadcast on Smith & Williamson at 09:00, 3rd of December 2020

Available online from 10:00 on the same day .

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