The week began with news that the Pfizer-BioNTech vaccine was 90% effective, that mass production had been launched and emergency regulatory approval for rapid use from the end of November was being sought. This news is the biggest step so far towards a substantive return to normality for the global economy, though of course this transition will be long and with obstacles to be overcome.
While the vaccine – known as BNT162b2 – seems to have achieved a much higher efficacy level than expected by epidemiologists, and has been developed much faster than hoped, the trial is not yet complete, and it is possible that safety concerns will still come to light. The high efficacy rate could still change, and we don’t yet know how successful it will prove to be in old and vulnerable people. Also, the vaccine needs to be stored at extremely cold temperatures which will raise the cost of use and impede distribution. It is also unclear how quickly it can be produced.
Economic forecasts look substantially improved with the impact of a vaccine, with Capital Economics estimating that it may allow GDP to rise to its pre-virus level a year earlier than otherwise and means that unemployment would peak at 7% rather than 9%.
We expect monetary and fiscal policy to remain extremely loose for the foreseeable future and to remain integral to our transition back to normality.
The markets’ reaction to the vaccine news was extraordinary; within 30 minutes of the announcement, various equity indices had moved more than 5% higher and government bond yields had spiked upwards, leading to losses in those areas.
Beneath the surface index level, enormous moves took place between optically cheaper ‘value’ equities and more expensive ‘growth’ equities as investors were forced to quickly recalibrate views on and estimates of future growth. Stocks in affected sectors such as airlines, cruise ships, cinemas and banking saw large price gains, whereas those previously top performing companies particularly in the tech and related sectors fell.
At the index level, the UK was the standout performer, with the FTSE 100 and 250 indices rising above all others in Pound terms by 7.0% and 7.6% respectively. Europe also rose strongly with a 4.8% gain, with the gains seen here and in the UK representative of their higher correlation to improved virus sentiment.
Elsewhere, higher risk areas of emerging market equities also performed strongly, namely Latin America and Eastern Europe, while other regions still saw gains but on a lesser scale. US equities rose by 2.1%, driven by the banking and energy sectors, with Japan (1.6%) and Asia (0.7%) still further back. As these latter two regions have performed strongly in relative terms to date given their better handling of the virus, they have less to gain from the vaccine announcement.
Government bonds sold off heavily, as did precious metals before staging a recovery into the weekend. UK Gilts fell by 1.5% and inflation-linked Gilts by 3.7%, driven lower by the positive news, with gold and silver lower by 3.5% and 3.6% respectively, though rallying off significantly lower lows.
While it is important not to get carried away with last week’s events they are certainly cause for optimism; hopefully to be boosted further in the coming weeks. We shall be watching closely for any new information on this and other vaccine candidates and what their impact may be on asset prices.
Market views by Ollie Stone – Head of Portfolio Management and Fairstone Private Wealth Ltd (16th November 2020)