Client Update - 13th November 2020
Updated: Nov 23, 2020
The past seven days have probably given me more key headlines to write about than the last seven months. It does not feel like a week ago we wrote with great interest in the outcome of the US election. I certainly did not expect that news to be almost surpassed within a few days as the COVID-19 vaccine candidate from Pfizer/BioNTech took the spotlight. Whilst we are not a huge amount further ahead in the outcome of the US election – other than we expect Joe Biden to be inaugurated on the 20th January, we do now know that we have hope in the prospect for a successful vaccine for the current pandemic.
That was not the only news that broke this week. Boris Johnson’s key man Dominic Cummings is off and will be gone by Christmas. The government appears to be looking to a ‘reset’ in the Spring, focusing on their post Brexit (and hopefully post-Covid) policy agenda. A cabinet reshuffle is expected, and this week’s departures suggests the manoeuvring has already begun.
There were also some positive developments from the UK Government regarding its commitments to green finance and sustainability goals. Spearheaded by the Chancellor, Rishi Sunak, the UK has set out to “bolster the dynamism, openness and competitiveness” of the financial services sector. The focus is on ensuring that the sector can continue helping to combat the effects of climate change. This can include reducing carbon emissions in the face of global warming, and increasing investment in renewables, for a greener economy and world. In seeking to achieve these objectives, the UK Government will issue the first ever Sovereign Green Bond in 2021. It will also become the first country in the world to make the recommendations of the global Task Force on Climate-Related Financial Disclosures (TCFD) an official requirement.
Brexit is also still bubbling along. Talks continued this week in London and it once again appears that the hurdles around a ‘level playing field’ and fisheries are yet to be overcome. The ‘deadline’ for an agreement looks set to be pushed back towards the end of the month. If there is an agreement it will likely need the intervention of the Prime Minister and European Commission President in the near future.
On the economic front, the UK third quarter growth saw the economy expanding by 15.5%. It is a record, but it seems rather odd, as is the way in this current world, to acknowledge that it was also slightly lower than expected. This follows on from the 19.8% contraction in the second quarter. The UK economy remains 9.6% smaller than the third quarter of 2019, and consensus for the fourth quarter suggests a return to contraction of around 3% as the impact of the increased restrictions and lockdowns weighs on growth once again.
With the headlines on the US election rapidly overtaken by what appears to be very encouraging news on a vaccine for Covid-19 as the results of the Phase III trial of the Pfizer/BioNTech vaccine were published, we have had the unusual circumstance of the UK market leading gains. The vaccine news led to a very strong start to the week for value stocks, with many cyclical names in sectors such as banks, energy and travel seeing very strong performance having struggled pretty much all year against a very poor economic backdrop. On the other side, the momentum stocks, not least the mega-cap tech names and those that benefit from the stay/work at home theme, saw underperformance. We will keep a close eye on how this develops moving forwards.
The moves witnessed on Monday saw some of the strongest outperformance of value over growth in almost 20 years and while a return to normality will be accelerated by a vaccine there remains a tough winter of restrictions and lockdowns to endure in the short term and this has been shown with the gradual retraction in markets in the last 48 hours. All the same, it was refreshing to see that there are still returns to be made outside of the largest growth names. The moves also highlight how out of favour the value and cyclical names have become. Whether this performance of value over growth can be sustained will be driven by the path of the pandemic and the economic recovery, and it is worth remembering that in the short term the news may get worse before it gets better.
News on the Pfizer/BioNTech vaccine trial was widely expected – what was not anticipated was the phase III trial suggesting that the vaccine has an efficacy rate of 90%. Bear in mind the US FDA had said the efficacy rate required for approval was 50%, so a 90% rate highlights how effective this vaccine appears to be. For some context, the annual flu vaccine has an efficacy rate of between 44% and 50% over the past decade. There are still several hurdles and unknowns to overcome, not least storage of the vaccine at minus 70 degrees, but the news was welcomed in financial markets. Pfizer will submit two months of safety data to the FDA by the end of the month; all being well emergency approval will follow shortly afterwards. In the coming weeks we will hopefully have positive phase III trial news from the Moderna and the Oxford/AstraZeneca trials.
We have mentioned in the past the quote “vaccines don’t end pandemics, vaccinations do”. The time it will take to roll out any vaccine still means we have a very tough few months ahead. We do not yet know how effective these vaccines will be at not only stopping symptoms but also stopping transmission and how long the vaccine will provide immunity.
In terms of the pandemic the headlines for the US and Western Europe continue to paint a bleak picture though, as we noted last week, there continues to be signs across Europe of a levelling off in case numbers in countries first impacted by the second wave. It appears that lockdown measures are once again having their intended effect, but we look to the US with more concern given the apparent lack of measures in many states at halting ever increasing case numbers. Several US state governors have spoken of their desire to avoid lockdowns – I remember hearing similar comments from politicians across Europe a couple of months ago.
That brings us back to the US election. As expected, Joe Biden continued on his path to the 270 electoral college votes needed and was declared the winner of the US Presidential Election on Saturday morning after it became clear he was building an unassailable lead in Pennsylvania. President Trump has failed to concede the outcome, choosing to make allegations without evidence of voter fraud and election irregularities. Given the US electoral college will not cast their votes until December 14th , we may see a few more weeks of noise and legal challenges from the Trump campaign but given Biden’s substantial lead in the electoral college and in the disputed votes across the swing states, it is highly unlikely any legal challenge will change the outcome, not least when it appears that there is no evidence of irregularities. Equity markets did not have much time to digest the confirmed election result given the vaccine news on Monday but a ‘blue wave’ that was a pre-election theme is now unlikely, but not impossible. The Senate contest in Georgia will go to a run-off on January 5th and whilst it seems unlikely that the Democrats will win both seats, if they do, the Senate would be split 50-50 with Vice President Harris having the casting vote. Georgia will likely see a lot of focus in the coming weeks, and if there is any money left in the coffers after the billions of dollars spent on the election campaign, it will all be heading in the direction of Atlanta. If there is no ‘blue wave’, then there will not be the fiscal stimulus the market was hoping for, and the financial recovery will continue to rely on the FED. In this scenario, we could see the US dollar weaken, providing further impetus for our Emerging Market / Asia overweight.
We do see a more positive path ahead for risk assets, and a continued rotation into some of the more beaten up names of recent years as confidence builds. The Bank of England see a recovery to pre-COVID levels of GDP by the 4th Quarter 2021. We still expect volatility ahead, not least as markets digest potentially bad news on the pandemic and further restrictions and lockdowns in the US, where the response to the surge in cases has been far more relaxed than the more aggressive response seen in Europe. But setbacks in markets should be seen in the context of a more positive assessment of where the economy and earnings can recover in 2021 and this presents us with long term investment opportunities on our client’s behalf.
The news of what appears to be a very effective vaccine certainly allows investors to look forward to a point in 2021 when a gradual return to ‘normality’ can be foreseen, and while we still see headline risks in the short term given rising case numbers, particularly in the USA, with a vaccine on the horizon there is the potential for any market weakness to be relatively short lived if investors have more confidence over the 2021 recovery with a vaccine in place.