Jonathan Marriott, Chief Investment Officer
This week, Russia announced plans to go ahead with their vaccine for COVID-19. This news caused equity markets to move higher and bonds to selloff. As yields rose, the gold price fell sharply. However, their decision to go ahead is not without its risks: the vaccine has yet to pass through stage three clinical trials and the World Health Organisation has not approved it for use. In any case, it will take some months to ramp up production. As a result, some of the market moves following the announcement partially reversed later in the week. It was, however, a taste of how markets could react to the end of the pandemic and we are starting to look at the implications for portfolios.
Whilst an effective vaccine becoming widely available could bring the pandemic to an end, some continue to question the likelihood of an 'effective vaccine'. After many years of trying, there is still no vaccine for HIV, for example, and some of the proposed COVID-19 vaccines may only have partial efficacy. To add further doubt, even if a vaccine were created, it may be some time away. All of these are scenarios that we need to consider. During the pandemic, portfolios that have been long growth stocks and technology have outperformed those with a more value orientation. While equity markets could be expected to broadly benefit from the end of the pandemic, the sector leadership may change. However, this is not to say that everything that has underperformed this year will outperform if the pandemic goes away.
Cheap lending, backed by central banks and fiscal measures to support the economy, has supported markets. In this country, we have the furlough scheme and in the US we have the Paycheck Protection Programme, other countries have their own versions, but all the schemes are aimed at keeping people on the payroll while they are not working due to the pandemic restrictions. As these schemes unwind, many will find that their jobs no longer exist. In particular, the retail sector has been hit hard by an acceleration in the move to online shopping. This was already a trend and it is unlikely that we will see a significant reversal. Working from home has seen fewer people on the streets of cities. While many people will return to the office, others have found that they can work from home and may choose to spend more time working from home permanently. Hence, footfall in the city centres is unlikely to be as high as they were prior to the pandemic.
The oil market was hit hard by the fall in demand. The dispute between Saudi Arabia and Russia caused further upheaval and resulted in an increase in production. Oil production has now been cut and demand has picked up to some extent. However, with fewer people commuting and the move to more environmentally friendly energy sources, the future of the oil sector may have as much to do with production levels as the end of the pandemic.
Many companies will have taken advantage of the loan schemes to keep going through the crisis. Loans have to be paid back eventually so the level of indebtedness may hamper future growth. Companies with strong balance sheets will be in a better position to prosper as the economy recovers from the pandemic. The cuts in dividends and share buyback programmes may put companies in a better position to grow in the post pandemic world.
People will return to taking holidays, eating out and other leisure activities, which will benefit those businesses that survive the pandemic. However, the longer the pandemic continues the more indebted they may become and their survival may be called into question. Recovery may be slowed by higher unemployment and debt. As a result, interest rates may remain low, although longer dated bonds may sell off to price in higher rates eventually. If this week is anything to go by, Gold will sell off with the bond market.
It seems inevitable that many businesses will not survive, while others will be impaired by debt for some time to come. Strong businesses may recover and flourish as the pandemic ends. Thus, we will continue to look for businesses that have strong balance sheets and robust business models. An effective vaccine may never be found and, at best, it will be some months before one is widely available. If it does happen, then tilting towards sectors that have suffered may be appropriate but a selective approach will remain the right approach. Just buying the companies and sectors that have suffered most will not necessarily be the answer.
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