Investors are finally able to see light at the end of the tunnel. Monday's news that Pfizer and BioNTech had secured a breakthrough in their quest for a vaccine against the Covid-19 virus boosted stocks that have struggled throughout the health and economic crisis. Some markets broke new records.
Now, some of the euphoria is wearing off. Doubts still linger around the potential vaccine — including how and when it will be distributed, and whether Pfizer’s jabs end up as the international solution. Some caution is warranted. But for fund managers paid to look ahead, such details are irrelevant. The key is that an end is in sight.
“Health-wise, all that is pretty important. But from a markets perspective, it’s not,” said Salman Baig, a multi-asset investment manager at Unigestion in Geneva. The US presidential election is over, leaving no serious doubt among fund managers that Joe Biden will take office in January, Mr Baig said, and the vaccine news for the first time opens up the real possibility of life returning to normal as soon as next year. “That’s two major sources of uncertainty that are much lower. We should see a broad rally from here.”
Global stocks were already floating around all-time highs before news of a potential vaccine broke, lifted by the huge dose of monetary stimulus administered by central banks from March to soften the financial impact of the pandemic. But Pfizer’s breakthrough was still enough to set new records in the MSCI All World index and the S&P 500 benchmark in the US.
“Despite investor focus on the prospective policy implications of the Biden presidency, the vaccine for Covid-19 is a more important determinant of the path of both the economy and stock market in 2021,” wrote analysts at Goldman Sachs on Wednesday as they lifted their forecasts for the S&P 500 for the coming months. The bank now expects the index — which closed at 3,585 on Friday — to reach 3,700 by the end of this year, from 3,600 expected earlier.
Crucially, this week’s rally came with a twist: stocks that have benefited from the shift to work and play at home, such as Zoom, dropped heavily, leaving the tech-heavy Nasdaq 100 index down more than 1 per cent for the week. Meanwhile, stocks in airlines and cinema chains, among others, rocketed, raising the possibility that cheap and unloved so-called “value” stocks — mainly in unfashionable industries closely linked to economic performance — could finally enjoy a resurgence.
Value stocks have suffered a decade-long losing streak, while growth stocks, typically in sectors such as technology, have been on a tear. Monday’s news hammered those trendy stocks, and sparked a powerful rally for dowdy value.
Amundi, the European investment group, said in its outlook for 2021 that the Pfizer vaccine is a “game changer”. But it cautioned that the path ahead will still be bumpy. “Markets are now pricing in a rosy scenario: broad availability of a vaccine, abundant liquidity, and policies that will remain accommodative for ever. The sequence will not be so linear,” chief investment officer Pascal Blanqué said.
So far, that has been borne out. Major stock markets have not lost all of their lustre from the vaccine development. But most lost ground towards the end of the week.
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In part, that reflects the nature of Monday’s rally. Stocks and sectors beaten up by the virus did shoot higher, but the most buoyant markets were those that had attracted the heaviest weight of negative bets, or shorts. These were boosted as investors reduced their short positions, analysts said.
The S&P 500, for instance, up almost 10 per cent this year, gained a modest 1 per cent, held back by the underperformance of big tech stocks. Europe’s markets, however, swept higher more forcefully, with the Stoxx 600 index gaining almost 4 per cent, the most since May. Within Europe, the gaps were also large. France’s CAC 40 index, for example, still bearing the scars of early 2020, jumped 7.6 per cent — its biggest rally since the March tumult and one of its biggest rallies of all the past two decades.
The more muted tone in markets by the end of the week also underlined how investors are grappling with competing factors. One is the tantalising promise of a return to normal life in the coming months. Markets serve to price in the future today, so it is standard form to bake that prospect into asset prices now. But the other is the grim current reality of drawn-out lockdowns in Europe and rapidly accelerating coronavirus infection rates in the US.
Time horizons are therefore crucial, fund managers say. “Short term, there’s the prospect of lockdowns in the US and more measures in Europe,” said Mr Baig. “You could try and play that. But from our perspective we don’t want to hold short-term views. That means we have to eat some volatility along the way, but for us that’s better than trying to time coronavirus-related news.”
The Financial Times Limited 2020