‘Moonshots’ aside, it is clear that the only real path out of our current predicament and into a full cyclical economic recovery is a vaccine. As a result, equity markets have become increasingly sensitive to vaccine developments across the globe, with positive vaccine being greeted with rising share prices. It is plausible that ‘vaccine euphoria’ may yet shift the mood in equity markets from growth to value. With this in mind, how close might a vaccine be?
The race to develop a vaccine is happening at unprecedented speed. Vast financial and intellectual resources have been marshalled in the search for a means to reopen the world’s economies. Vaccines usually require a decade or more to test and produce at scale. Yet current predictions are for more than one vaccine to be ready as early as the start of 2021 and widely available, at least in developed markets, through Q2.
These predictions appear realistic: as it stands there are almost 190 vaccines in one of the four stages of development – pre-clinical, phase 1, phase 2 and phase 3. The world is focused on the 7 vaccines currently in phase 3, where the vaccine is tested on thousands of people looking for rare or long-term side effects. Given that the majority of problems tend to be ironed out in phases 2 and 3, around 85% of phase 3 vaccines are ultimately approved by government authorities1.
This sounds optimistic, but there are caveats: no coronavirus vaccine has ever been tested or used at scale. That said, no coronavirus has ever provided the vast number of test cases or the urgency on the part of policymakers. Equally, no vaccines are 100% effective: the US Centre for Disease Control says the flu vaccine can be less than 50% effective. The big question here is the extent to which the virus mutates and that is not yet clear for Covid-19.
There is also the problem of uptake. The anti-Vaxxer movement has been gaining momentum in the US and many have suggested they will not take the vaccine if it’s offered. Politicians apparently trying to rush through a vaccine ahead of an election have not helped the cause. The pledge from nine pharmaceutical companies not to submit vaccines for FDA approval before confirming their safety should help. Alternatively, governments may use compulsion. Certainly, if people need a vaccine certificate to be able to work or travel freely, it may focus their mind.
To date, sentiment around vaccines has been volatile. It was very positive in late April, very negative in late May and has been hovering around neutral ever since. At most, positive vaccine news has contributed around a quarter of US equity returns since the lows on 23 March. This suggests there is no ‘exuberance’ in the price today2.
That said, where there have been ‘positive vaccine’ days, it has generally been good for certain sectors – notably small caps, the US markets, and value stocks (which tend to be more economically sensitive). The most sensitive sectors have been the most cyclical, such as semiconductors, energy, aerospace and defence, plus consumer services. Perhaps surprisingly, the sectors that have shown the worst return on ‘positive vaccine days’ have been the pharmaceuticals, biotechnology and life sciences sectors. This may be because the vaccine news will usually only benefit one company – that making the vaccine – while all the others miss out.
As we see it, the market’s current optimism has been largely concentrated in a handful of high-performing technology stocks that have particularly benefited from lock-down. It is possible that an approved vaccine would spread this optimism more widely, potentially even benefitting those sectors worst-hit by the lockdowns and the economic weakness. It may be a better environment for cyclical ‘value’ names; this may be where investors should focus their attention should a vaccine gain approval.
1. Deutsche Bank, data as at 2 September 2020
2. Bloomberg, calculations by Smith & Williamson Investment Management LLP, data as at 7 September 2020
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