Jonathan Marriott, Chief Investment Officer
"Now this is not the end, it is not even the beginning of the end. But it is, perhaps, the end of the beginning." (Winston Churchill, 1942)
The news on Monday that Pfizer, working with BioNTech, had developed a vaccine that was 90% effective had an immediate impact on markets. Many stocks that had suffered during the pandemic rallied sharply. This resulted in a rotation out of the large cap tech stocks, which have led the US market higher during the pandemic. However, as the week progressed, the rally faded and tech stocks recovered as it became clear that it would take a long time for the vaccine to be delivered.
The new vaccine is undoubtedly good news but it is not going to be easy to distribute. This vaccine needs to be stored and transported at -80 centigrade. A normal freezer typically cools at -20˚C and some could get to -35˚C, however, -80˚C requires specialist equipment. Only 50 million doses will be available this year (enough for 25 million people). By the end of next year, Pfizer said they could make 1.3 billion doses which would be enough for 650 million people or 8% of the world population. The really good news is that it is easier to manufacture than traditional methods. Several other vaccines in development, including the Oxford-AstraZeneca vaccine, are using a similar technique. The Oxford-AstraZeneca vaccine is said to be able to be stored at -8˚C, so should be easier to deliver if it passes the ongoing trials. These vaccines mean that patients do not develop symptoms of COVID-19, but it is not clear yet that they will not be infectious to others. In any event this is "not the end, it is not even the beginning of the end. But it is, perhaps, the end of the beginning." Lockdowns and restrictions may have to continue through much of 2021.
From a market point of view, it is a light at the end of the tunnel resulting in travel and leisure company shares rallying sharply on Monday. As an example, the easyJet share price was up over 30% but remains over 50% off from the pre-crisis level. With not enough passengers to cover the ongoing costs each month, this results in increasing debt levels. The longer this goes on, the harder it will be to recover from this crisis. While demand may recover, companies in adversely affected sectors may be burdened for a long time after the pandemic is over and may struggle to regain their profitability and growth post the pandemic. Many pubs, restaurants and shops will still close permanently. Support will be needed from both central banks and governments.
The tech sector has led equity markets this year, with the tech heavy US Nasdaq index up 31% this year, versus the wider S&P 500, which is only up 10% at the time of writing. The FTSE 100 has very little tech and is still down 16% for the year. Tech underperformed at the end of October, but recovered after the US election result. Following the vaccine news, there was a renewed switch out of tech into the value sector that has struggled this year. The tech sector sentiment was further damaged by the Chinese authorities move to crack down on tech company's activities in financial services. This followed the suspension of the ANT Financial initial public offering last week. However, by the end of the week, tech stocks had recovered their poise. The retail sector has been hit by a switch to online shopping. Post-pandemic there may be a partial return to the high street, but the move online was an acceleration of a much longer-term trend that is unlikely to reverse.
It has been a rollercoaster couple of weeks in markets, which is likely to continue. President Trump has yet to concede the election, while republicans are beginning to distance themselves from him. The US Election Infrastructure Government Co-ordinating Council, which includes officials from the Department of Homeland Security and Republicans and Democrats, have said that "there is no evidence that any voting system deleted or lost votes, changed votes, or was anyway compromised". Let us hope that Trump finally accepts that he has lost the election and allows the transition to proceed smoothly. Fortunately, Biden's appointments so far comprise many people with experience in their departments in the Obama administration who know their way round government circles.
If there were not enough events taking place this week, we have also seen a shake-up in Boris Johnson's staff with Dominic Cummings and Lee Cain leaving by the end of the year. Brexit negotiations continue and Joe Biden, in his first call with Boris Johnson, stressed that there must be no action that harms the Good Friday Agreement. There is still no agreement on the main sticking points and the deadline for getting a deal done is gradually shifting out. Pressure from the President-elect may put the EU in a stronger position and force a compromise from the UK if they want a US trade deal. It is unclear that the changes in staff at Number 10 signal a change in direction on this.
It has been a busy few weeks in markets and trying to call the daily moves has been impossible. The benefits of a diversified portfolio and remaining invested during volatile times have come to the fore.
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