Friday, 20th of November 2020
“Economic progress, in capitalist society, means turmoil.”
– Joseph A. Schumpeter
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Equities continued to power higher this week after the US biotechnology company Moderna on Monday announced that its covid-19 vaccine was c.95% effective against the virus. Like Pfizer, Moderna used a (novel) mRNA-based technique to develop the vaccine; and there were therefore high hopes for its success after Pfizer’s excellent stage III trial results were released last week. Nevertheless, the strength of the immune response that Moderna’s vaccine triggered (including in vulnerable and elderly patients) is undoubtedly a big win for mankind in its war with the coronavirus. What’s more, this vaccine can be stored at a positively balmy -20C (vs. -70C for Pfizer’s version). This will make distribution a lot simpler and cheaper and should allow for a faster roll-out next year, not least for countries with weak healthcare systems and large distances to cover between population centres and isolated groups. More generally, to have developed not one but two highly effective vaccines within a year of this deadly disease having been identified is completely unprecedented. Vaccines can be decades in the making and most medical experts consider one successful if it provides immunity in 70-75% of cases. The efficacy of the first two coronavirus vaccines and the speed at which they were developed is therefore remarkable. Indeed, it is testament to the extraordinary pace of healthcare innovation that we have seen in recent years. New technologies and methods have completely transformed the sector, from drugs to diagnostics, and we expect this trend to accelerate in the wake of the virus. Clearly, healthcare stocks have soared this year, and, with an economic recovery now on the horizon, defensive equities may not be your first port of call when building a book today. But the case for a healthcare overweight long-term could not be clearer.
Value and cyclical sectors again beat ‘stay-at-home economy’ stocks this week as investors digested the positive vaccine news. And this sector rotation (again) helped European markets to outperform the US because of the former’s greater exposure to stressed sectors. While the S&P 500 is flat for the week ahead of today’s session, the pan-European STOXX 600 Index was up +0.9% by the close of trading on Thursday, and it has climbed still further since the Friday morning open. Investors are really buying into the narrative of European outperformance in the covid-19 recovery phase even as the continent battles an explosion of cases in the run-up to Christmas. We do not necessarily disagree with this view. Not only will Europe benefit most from a return to normality when the coronavirus vaccines have been widely distributed, but the (Merkel-friendly) Biden Presidency and the increasingly imminent end to four years of crippling Brexit uncertainty should support European markets next year. However, it should not be forgotten that the economic effects of the pandemic will outlast the virus itself; and most European countries have responded to the growing winter wave with the same economically calamitous stop-start lockdown measures that have sown such chaos around the world since March. Even Sweden, which has long been a liberal outlier in its response to the virus, has tightened restrictions notably this week as cases climb. There are many long months of pain ahead, and we do not recommend that you go all-in on big reflationary bets just yet. Stay invested but stay diversified is our advice.
The final topic for this week’s newsletter is the ongoing Brexit saga. We are now one month away from the end of the transition period, after which the UK and EU will finally go their separate ways (sort of) and a ‘no deal’ outcome remains a distinct possibility. The big issues – fisheries, state aid, and the nature of the dispute settlement mechanism – are still unresolved and neither side is backing down. At least, that is the spin; and, as both sides try to land last minute concessions from the other, the public brinksmanship is likely to continue (right down to the wire). Presumably, however, after so many years of talking they know if a deal is doable; if there is (at the very least) a slim landing zone for an agreement. We suspect there is. The covid-19 pandemic has been a disaster on such a scale that a ‘no deal’ Brexit now seems like child’s play. But an acrimonious split has the potential to be more of a threat to the UK and EU in the long-term. (Afterall, the English Channel is not getting any wider… no matter how hard the Brexiteers push the EU away.) Both sides will have to learn to live with the other if either is going to be a success. And a deal now would set the right tone for a strong future partnership. The recent exit of the Vote Leave masterminds from Downing Street, where they have been important advisors to PM Johnson, suggests that this is where his government sees things headed. The time may be coming to buy UK Plc at what is fairly hefty discount.
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