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Ever since COVID-19 infringed upon homes, markets and economies in early 2020, the world has been crying out for a vaccine. Finally, in November, the scientific community appeared to have arrived at a breakthrough. Pfizer – a US-based multinational pharmaceutical corporation – announced with its BioNTech partner that it had developed a vaccine at 90% efficiency. Stock markets were quick to respond, with the FTSE100 jumping 4.7% to 6,186 points – adding £70bn to the value of the index.
On Wall Street, American stock markets also responded positively – with the S&P 500 climbing to a record 3,645.99 points. After a year of market volatility, many investors are now starting to wonder whether 2021 might hold out a better year for the equities in their portfolio. In this article, our financial planning team here at Cedar House offers some reflections on how new COVID-19 vaccines might affect stock markets in 2021.
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2021 – a return to normality?
Of course, the public’s biggest hope at the time of writing is that the vaccines from the likes of Pfizer, Oxford University and Moderna bring back a return to “normal life” in 2021. We all want to visit friends and family freely, to travel and conduct our affairs as before. In particular, for pubs, restaurants and other sectors hard-hit by COVID-19, a viable vaccine could re-energise equity demand and bring in much-needed customer revenue.
Greater optimism about a vaccine could produce stronger consumer confidence and generate sectoral rotation. It may also create some geographical changes in the investment landscape. In 2020, Asian economies such as China, South Korea and Taiwan have attracted higher inflows of investment as they have demonstrated greater efficiency at containing COVID-19 compared to Western economies. This “pandemic-management advantage” becomes less important in a world with a viable vaccine – possibly pulling more investment back to Europe and the US.
A resumed bull run?
The deeper question, of course, is whether these recently-announced vaccines signal the start of a global equity rally in 2021. Perhaps 2020 will merely represent a “blip” in the near 11-year global bull run the world enjoyed since the 2008-9 Financial Crisis?
As optimistic as this sounds, investors should exercise caution. There are still currently many unknowns such as whether the vaccines can stop people carrying the virus, as well as huge logistical challenges in distributing a vaccine across the world to billions of people. In short, life may not “return to normal” for some time yet.
Even in a “best case” scenario in 2021 where COVID-19 is effectively eliminated, it is still not yet clear how economies, consumer behaviour, businesses and their supply chains will be affected in 2021. Oil – one of the hardest-hit sectors during the pandemic – is a case in point. In 2019, the global demand for oil may well have “peaked” according to Norway-based consultancy DNV GL. Air travel has understandably slumped in 2020 due to international restrictions, yet will it return to “pre-Covid” levels in 2021 and 2022? With the Paris climate agreement goals also looming, perhaps governments will now have less to lose by curbing air travel to help meet them.
Currencies & treasuries
Two other important areas for investors to watch in 2021 are monetary policy and government bonds. In short, how might COVID-19 vaccines affect governments’ abilities to borrow money, and how might investor returns (i.e. bond yields) be affected by lending it to the former? Here, the implications are more open to question. Following Pfizer’s and BioNTech’s announcement of a 90% effective vaccine in November, the yield on the benchmark of the 10-year US Treasury saw a gain. However, central banks like the Federal Reserve and the ECB (European Central Bank) have not yet been convinced to raise nominal government bond yields.
The impact of vaccines on currencies are also open to question. For instance, if these help lead to recovery in the US economy in 2021, then these vaccines might benefit the currencies of the countries which act as key goods suppliers to the US (e.g. China, Taiwan and Korea). On the other hand, the USD will likely become more attractive to investors if longer-end US Treasury yields climb further. The ECB, moreover, could loosen monetary policy even more in December, possibly leading to even lower interest rates and stimulated borrowing.
Conclusion & invitation
We welcome the news of potential vaccine candidates for COVID-19 here at Cedar House. Yet it’s important for investors to recognise that, even in the most optimistic scenarios, the effects of the pandemic on household finances, markets and national economies will not end immediately. Speak to your financial adviser if you need further clarification on how “vaccine optimism” may affect your portfolio in 2021.
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