A jogger from Wiltshire has discovered a new variety of apple as he went out for a run alongside a large area of ancient woodland near his home. Archie Thomas, from the Nadder Valley, said that although he is “certainly no fruit expert”, he was “excited by the pale and mottled oddity”. As its discoverer, Mr Thomas has the opportunity not only to propagate the apple but to name it too!
Last week saw more crunch than a donkey with a Granny Smith as UK-EU trade negotiators run into yet another roadblock resulting in a fresh political intervention from the UK Prime Minister and EU Commission President. Asset class returns are below; despite the trade agreement looking to be on rocky ground, UK equities were among the strongest performers last week as the bounce in cyclicals continued to pick up pace.
Figure 1: Asset class total returns in base currency
Source: Bloomberg, EQ Investors
Following last week’s blog about the AstraZeneca/Oxford University vaccine, a client has asked how we think markets might develop over the next few months. There is no doubt that this question is echoing through financial markets as investors around the world attempt to rationalise Covid-19 case numbers with the latest economic and market data.
Two weeks ago, we touched on the vaccine news from Pfizer/BioNTech and Moderna and how different parts of the market had started to react. We looked specifically at working-from-home winners and vaccine winners, two groups of stocks that have either benefited or suffered from Covid-19 lockdowns.
In the short-term, one of the largest risks for those who own Covid-19 winners is that a vaccine ushers in a speedy return to “normality” and that lagging industries begin to catch-up. This is illustrated in Figure 2 which shows that while working-from-home winners are holding steady, it’s almost a case of “any vaccine news is good news” for those companies severely impacted by the pandemic.
Invariably there will be more vaccine news between now and “normality”, and market sentiment will ebb and flow accordingly. So, despite rising case numbers in certain geographic regions, the fact the world now has three effective Covid-19 vaccines on the cusp of regulatory approval alters the fundamental question from “will we ever return to normal?” to “when will we return to normal?”.
Figure 2: Though working-from-home winners have performed well year-to-date, vaccine winners are beginning to rebound from their lows…
Source: Citibank, EQ Investors
Figure 3: …however they still have some way to go to catch up!
Source: Citibank, EQ Investors
As the prospect of a return to “normality” comes to the fore, the strength of market force should not be underestimated. This is evident from last week’s moves in equities where the UK is a top performing market notwithstanding the ongoing narrative that UK and EU negotiators remain deadlocked on a UK-EU trade deal. With the transition period following the UK’s departure from the European Union due to end on 31 December 2020, this new trade agreement is supposed to come into effect from 1 January 2021 but it is yet to be agreed or ratified by both the UK and EU Parliaments, as well as each of the remaining 27 member states’ national parliaments.
A diverging equity market from a region’s underlying economics is not a new phenomenon. For the UK, this was exemplified around the time of the 2016 referendum where economic forecasts were slashed, and equity markets soared in response to a depreciated sterling. This time, we see that the UK equity market has one of the highest risk exposures to industries affected by Covid-19 making it one of the largest potential beneficiaries of a vaccine (see Figure 4). The difficulty for investors here, however, is refining exposure to those vaccine beneficiaries while minimising exposure to domestically-facing UK companies whose economic prospects may be at risk in the longer-term.
Figure 4: The UK is one of the worst affected regions based on its exposure to high Covid-19 risk industries
Source: EQ Investors
As we observe the start of market rotation from working-from-home winners to vaccine winners, investors will naturally be looking longer term. In many ways, it will come back to a multi-decade long debate around which investing style will outperform; value stocks (i.e. those with cheap valuations) versus growth companies (i.e. fast growing revenues). While there are many parallels between working-from-home winners and growth companies, and between vaccine winners and value stocks, a sustained vaccine winner/value over the long-term will require more than just a shot in the arm.
Typically, value stocks perform well relative to growth companies in periods of rising interest rates and strong economic growth. But as we touched on a few weeks ago, developed market economies face an uphill struggle coming out of this recession with record levels of government debt, low trend growth (even before the coronacrisis), and the prospect of rising global barriers to trade despite a Democrat win in the US. For this reason, we are currently looking to add companies with cyclical-like exposure that can benefit from the vaccine boost, but whose long-term growth prospects are supported by secular trends.
STAT OF THE WEEK: 800,000 – the number of doses of the Pfizer/BioNTech vaccine that will be available in the UK in early December after it was granted regulatory approval (BBC).
Data correct as at: 30/11/2020
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