Is a vaccine already priced in?
It is unlikely global sharemarkets would have rallied back from March lows to all-time highs without optimism over a Covid-19 vaccine. And while progress towards effective treatments and ultimately an effective cure will continue to drive markets into 2021, investors still need to consider a range of potential outcomes.
With this in mind, we asked Andrew McAuley from Credit Suisse, Olivia Engel from State Street Global Advisors and Anthony Aboud from Perpetual Investments how important (or unimportant) they believe a successful vaccine or treatment for Covid-19 will be to the recovery of markets and economies, and to what extent these positive developments have already been factored in by investors.
Markets have priced in successful vaccine, but timing remains key
Andrew McAuley, Credit Suisse
Covid-19 caused a sharp correction in markets followed by a sharp V-shaped recovery into August. Since then, markets have weakened, but more in a ‘business as usual’ way without any particular panic. So now we find ourselves with the Nasdaq 26% above where it started the year, the S&P 2% above, and the ASX200 Accumulation lagging 14% from where it started 2020, but still 29% above its March lows. It is clear markets have factored in a high probability that a vaccine will be developed. The 12-month forward PE ratio for the MSCI World is 21.2x, about 40% above the long-term average.
However, the full valuation is not just about the probability of a successful vaccine in the next 12 months. Probably the biggest factor is central bank policy leading to record low bond yields, which favours long duration assets like shares.
The recovery in markets has also been driven by rapidly improving economic data, as countries opened up after Covid-19 lockdowns.
The discovery and timing of a successful vaccine remains a critical issue. Firstly, without a vaccine, a second or third wave, as we are now seeing in the Northern Hemisphere, will slow economic growth leading to earnings downgrades. Secondly, there will never be a point where the medical fraternity working on a vaccine say it’s impossible. There is always hope. But if high profile vaccines like the Oxford or University of Queensland offerings should fail, recovery expectations will be pushed out to some degree. Finally, a correction like we saw in March is unlikely even with bad news on vaccines. That’s because central banks and governments are taking a ‘whatever it takes’ approach to supporting the economy. For central banks the primary tool is pushing bond yields to close to zero. This makes equities look relatively attractive.
Vulnerabilities like unemployment to dampen recovery
Olivia Engel, State Street Global Advisors
It’s probably fair to expect a vaccine discovery some time in 2021, given there are 140-odd vaccines under development around the world. While there is a high probability a vaccine will eventually be found, the timeliness is highly uncertain, and the readiness of a vaccine for mass production and deployment is also uncertain.
There are some pockets of the market that are vulnerable regardless of whether a vaccine is found. Segments where margins were historically tight, balance sheets were thin. These may now have a solvency problem that won’t be solved by a vaccine because it will probably be too late. The vaccine can’t undo bankruptcy. There is also a lot priced into markets that relies on the consumer balance sheet returning to normal. But there will be major impairment to consumers. Unemployment will likely curb the ability for companies in the consumer segments to recover as strongly as the market expects. This is a risk whether or not a vaccine is found.
Covid-19 vaccine, treatments may not revive consumer confidence
Finding a vaccine or treatment is extremely important as it will enable the different political leaders to more confidently loosen restrictions, which in turn, should start to get the economies returning closer to normal. While a lot of media and political attention is focused on the daily infection and death rates from Covid-19, a more long-lasting silent killer is the mental health issues caused through isolation, lack of school/sport and financial anxiety from unemployment. Given this is hard to measure it is understandable that it doesn’t get the media or political attention. However, we feel that on many levels, not just the markets, successful vaccines or treatments are very important.
The fact that it is so important from a global perspective to find a vaccine or treatment gives me confidence that one will be found. There is so much political, regulatory and commercial incentive for a treatment or vaccine to be found. With so much weight pushing in the same direction and so many incredibly smart people working on it,
I would not bet against humanity to surprise the world with their ingenuity and speed.
There will be plenty of naysayers who will point out that a certain vaccine may not have 100% efficacy or that it will take 12-18 months to reach commercial quantities or that people will refuse to take the vaccine. Controversially, I say that none of this actually matters. There is not just one ‘moonshot’, there are many different vaccines and treatments being worked on. Even if a few only have 30-50% efficacy and are safe, this combined with an existing pool of already infected population should be enough to protect against the vulnerable.
As for the time taken to reach commercial quantity. Again, I don’t think this will matter for markets if it is 12 months or 18 months. If markets can see a clear path, they will look through the short term. Finally, if people refuse to take the vaccine, then I am not sure that this will stop the politicians opening up the economy. The political narrative will likely shift from protecting the vulnerable — despite the cost to the other 99% — to growing the economy even if it puts the vulnerable who choose not to take a vaccine at risk. One psychological aspect which is very hard to predict is consumer confidence. This is an important ingredient for any economic recovery. We believe that any vaccine or treatment should have a positive impact on consumer confidence and hence this should compound any economic recovery.
Optimism over a Covid-19 vaccine has largely insulated global equities from the bad news that has appeared on other fronts. But while the economic damage caused by the pandemic lockdowns continue to cast a long shadow, markets seem prepared to take a long-term view while the prospect of an effective, widely available vaccine remain good.
In the second part of this series, our three contributors will discuss the potential winners and losers if (or when) a vaccine or cure is made available. Hit the 'follow' button to be notified when the wire is posted.
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Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.
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