A breakthrough in the global search for a Covid-19 vaccine has been more influential on global markets than the US presidential election, but investors hoping it will boost a rotation into recovery stocks and revive the economy have been warned that questions remain over safety, efficacy and distribution.
Earlier this week, US pharmaceutical giant Pfizer and German biotechnology firm BioNTech reported a 90% success rate in a phase III trial of a coronavirus vaccine causing an uptick in global markets, led by sectors and stocks that had been beaten down by the pandemic.
“The result of the US election was big news for the world, for the economy and markets. But as an investor I’ve always considered the pandemic of far greater consequence,” says Schroders chief investment officer and head of multi-asset Johanna Kyrklund. “The most extreme electoral outcomes – a ‘blue wave’ or a contested election – were avoided and now they matter less in any case.”
Bank of England governor Andrew Bailey told a Financial Times event on Thursday the development was “very encouraging” for the UK economy, but he urged caution, saying there is a long way to go in trialling, production and distribution of the vaccine.
The three risks around how the vaccine develops
A note from analysts at Citi published this week identified three risks around the future success of the vaccine: safety, efficacy in subgroups and distribution.
On safety they said the sample sizes of the phase III trials were insufficient to exclude any rare adverse events occurring in less than 1 in 44,000 individuals, which would only be detected in commercial roll out.
They also noted the initial efficacy analysis in the Pfizer trial was based on a small total number of symptomatic infections – 94 out of 44,000 – which did not account for the effect across different ages, ethnicities and baseline medical conditions.
“While the data may give a meaningful representation of the efficacy in the overall patient population, the data provides no information in potential divergent benefits across subgroups,” they said.
Distributing the vaccine is also likely to prove problematic. Unlike other vaccines, the Pfizer/BioNTech product cannot be removed from an environment of -70C more than four times.
In an interview with research consultancy Primary Access and Research, BB Healthcare fund manager Paul Major says this was “far from ideal”, but is not unmanageable for distribution in hospitals or at specialist vaccination centres “if the requisite refrigeration has been provided”.
Logistics issues could slow progress
It has been suggested that mass vaccination could begin in early Q2 2021 in the US and some European countries, but the logistics are not to be under-estimated, says Major, noting the UK manages to vaccinate around 15 million people for the flu each year which takes about four months.
“To vaccinate the around 50 million people aged over 18 is thus going to be a huge logistical challenge,” he says, adding: “We are a bit more cautious in our assumptions, thinking mass vaccination is more likely to begin in H2 2021.”
Then there is the possibility that restrictions on populations, including full lockdowns, will remain in place until herd immunity has been achieved, which Major says requires 67-78% of the population to be vaccinated.
“Even if we start mass vaccination in the spring of 2021, is it really realistic to think this will be achieved by year end? Let’s not forget that children make up a teens percentage of the overall population.”
How Barry Norris’s vaccine company shorts have fared
In September, Argonaut’s Barry Norris told Portfolio Adviser why he is shorting vaccine companies in his Absolute Return fund portfolio, describing them as a “speculative bubble”. He said even if a successful vaccine is found, the best-case scenario is that it mitigates the virus rather than eradicates it.
Commenting after the Pfizer announcement, Norris (pictured) says he closed out shorts in BioNTech, Moderna, and Novavax six weeks ago and Curevac more recently “at healthy profits”. His only remaining shorts are in Vaxart and Inovio Pharma, both of which reacted negatively to the news, initially dropping 20%.
Norris remains sceptical, however, noting that the Pfizer result didn’t measure severity of infection and that nearly all the volunteers were healthy adults, under 55 years old. “There is no data from the old and already sick, although they [Pfizer/BioNTech] will say at 90% efficacy in healthy adults, it has greater chance of working.”
He adds: “Given the question marks about whether the vaccine works in the ‘vulnerable’ and absence of any data showing prevention of human to human virus transmission, our thesis that these vaccines do not provide a ‘silver bullet’ still holds.”
A true rotation into recovery stocks?
Despite potential hurdles, the short-term impact on markets is undeniable. Companies in the consumer and leisure sectors have received a boost, while those positioned for a stay-at-home environment including technology names, have done less well.
The positive news has raised hope among value investors of a long-awaited comeback against growth. “Is this the start of a major rotation? Quite possibly,” says Kyrklund. “We may finally have found the catalyst to spark a move away from the ‘stay-at-home’ stocks that have benefited from lockdown, towards recovery stocks.
“There would no longer be a need to pay a large premium for the few areas for growth, if all sorts of companies return to growth as the economy recovers.”
TB Saracen Global Income and Growth fund co-manager Graham Campbell describes the vaccine development as a “turning point in equity markets”, particularly coming on the back of the US election result.
“Many businesses that fall into the value category, such as financials, more cyclical industrial companies and oil and gas rallied dramatically from a low base, remain very cheap and will benefit significantly from a resurgence in global activity.
“We appreciate this is early days, but we are cautiously optimistic this will be the start of a long-term trend in which price is again considered when valuing a business.”
Economically we remain on a road to an unknown destination
Square Mile investment director Jason Broomer says progress on a vaccine does not alter the unprecedented fiscal backdrop with interest rates set to remain at zero and government borrowing to continue at “mind boggling” levels.
“Policy makers will continue to react to short-term difficulties and crises but there is no strategy to return to a more ‘normal’ economy,” he says. “Presumably governments cannot borrow at current levels indefinitely, why else have they bothered to raise taxes over the last 3,000 years?
“Economically, we are on the road to an unknown destination and we should step forward into what today feels like a brightening world with a degree of caution.”
By Sebastian Cheek, 12 Nov 20