With markets changing pace on Monday following news of a breakthrough in coronavirus vaccines, investors wonder if this could be the start of a sustained rotation towards unloved “value” and cyclical stocks.
Pfizer (PFE.N) and its partner, Germany BioNTech (BNTX.O)announced that the Covid-19 vaccine they developed was more than 90% effective in late-stage studies.
Schroders’ Chief Investment Officer and Head of Multi-Asset Investments, Johanna Kyrklund, said the milestone “properly dwarfed” confirmation that Joe Biden won the presidential race over the weekend, which many hope will result in a new stimulus package in the US.
“The prospect of a possible return to normal has understandably thrilled investors, as equity markets have soared around the world,” she said. What was remarkable, however, was which markets and sectors rose sharply.
The FTSE 100 rose 4.7% on Monday. The UK blue chip index, which has a large weighting for economically sensitive energy companies and banks, expanded its gains yesterday and today, up nearly 8% this week.
British Airways owner International Consolidation Airlines Group ((IAG) has risen by over 40% since the beginning of the week, but has still fallen by almost 42% since the turn of the year.
Kyrklund said it was “likely” the start of a major rotation as investors moved from “stay-at-home” stocks, which have benefited from lockdown environments, to recovery stocks.
The news from Pfizer and the medical advances that are making the virus more treatable have significantly reduced the likelihood of a very slow “L-shaped” recovery. When activity picks up across the economy, it becomes harder for investors to justify the high prices of growth stocks that have been exposed to parts of the economy that have done better.
In such a scenario, stocks like Amazon (AMZN.O)that fell more than 8% on Monday and Tuesday before rising 3% on Wednesday, continue to slide.
More questions than answers
Paul Major (pictured), a specialist fund manager in the health sector, said the announcement was like “a small slit of light at the end of the very long and dark tunnel,” as he called for it a reality check.
“The collective view seems to be that the virus is defeated and we can go back to normal life. Not so fast, ”said the manager of the £ 833 million BB Healthcare ((BBH) Investment Trust.
Major who has before undermined investor confidence about a vaccine, said many questions remain to be answered. These include the duration of protection, effectiveness in vulnerable populations such as the elderly, and the logistical complexity of introducing a vaccine that must be stored at -80 ° C.
The manager, who works for the Swiss fund group Bellevue Asset Management, believed that this development signaled a gradual return to normal over the next 18 months instead of six. This puts the rally in a different light for pandemic stocks, and airlines in particular.
“The question for investors is which cyclical and discretionary companies that weather the decline in Covid demand can survive this long without asking the market for an injection,” Major said.
British “thought experiment”
The UK government has ordered 40 million doses of the Pfizer vaccine, which requires two doses to be effective. The US bought 100 million cans, while the EU today agreed to buy up to 300 million cans.
Jim Reid, Head of Global Fundamental Credit Strategy at Deutsche Bank, presented a “thought experiment” on how this could change the situation for the UK.
While Reid conceded that the trial results were not broken down by age, he noted that over 85% of official Covid-19 deaths in the UK came from the cohort of people over 70. This age group has also caused about half of coronavirus hospital stays recently, but only accounts for about 10 million of the UK’s 68 million residents.
Key workers would also be given high priority for the 10 million shocks the UK expects from Pfizer by the end of the year, pending regulatory approval. Even with the two doses required, these numbers suggest how quickly it might be possible to move towards normal.
“If the efficacy numbers for the elderly were near the 90% overall level, society would surely learn to live with the virus long before a full vaccine was introduced (and herd immunity acquired) as you are protecting major demographics very quickly This led to the health services becoming overloaded, ”he said.
Pfizer and BioNTech expect full safety data from the study to be submitted to US and EU regulators by the third week of November, which could mean an emergency clearance next month.
The rollout will not be easy
Adam Barker and Tara Raveendran, health sector analysts at stockbroker Shore Capital, said that in addition to the high efficacy shown in the study data, the absence of serious safety concerns was critical.
“The importance of safety data for this vaccine cannot be emphasized enough.” Given that the disease is mild in many and potentially hundreds of millions (if not billions) of people to be vaccinated, any safety signal that can be proven to be associated with the vaccine would be critical to its chances of approval, ”they write.
The couple also focused on uncertainty about how long immunity would last, while questions about the rollout and how the distribution would be split were raised.
There has never been a commercially available mRNA vaccine like the one made by Pfizer and BioNTech. This means that “there may not be any experience of large-scale manufacturing and distribution,” they said, assuming that many countries would have problems with storage. Authorities will also be concerned about taking over manufacturing of existing vaccines, while manufacturing components like syringes needs to be stepped up.
“We suspect this will not be an easy rollout,” they said.
Pfizer has downgraded its target production of 100 million cans this year to 50 million. How and when countries would receive these doses is unclear, the analysts said.
The couple estimated that including the expected waste, 30 million cans – the amount Britain originally secured in July – would cover around 12 million people. They called it “enough for vulnerable groups in Britain” 10 million more shots ago and supported Reid’s thought experiment.
The Deutsche Bank analyst also pointed out that Monday’s news was positive for other candidates using the same mRNA technology, including Moderna (MRNA.O)Vaccine itself in phase 3 trials. CureVac (CVAC.O) and India Zydus Cadila (CADI.NS)The vaccines will be included in their own late-stage studies next month.
Data from the late-stage trials of AstraZeneca ((AZN) and the Oxford University vaccine is also expected later this year.
Vaccine “winners” and “losers”
Stockbrokers Peel Hunt and Jefferies said that on a simplified level, many of the stocks that struggled the most during the pandemic would be the most obvious “winners” of a vaccine, especially given the troubled stock prices now. In the meantime, some companies seen as benefiting from lockdown and accelerated digitization may emerge as “losers”, although many others would likely hold onto their market shares.
Peel Hunt analysts wrote ahead of the Pfizer News Friday on whether a single approved vaccine candidate – a stage we are not yet in – would be enough to generate a wholesale rally for cyclical stocks, as opposed to the kind of rebound that we’ve seen since Monday.
“Maintaining the short-term mood swings requires steady progress in activity levels. In our view, approval of an initial vaccine candidate is likely necessary, but not sufficient to ensure this, ”they said.
In the industry, analysts said that commercial aerospace was one of the few sectors that was still in “cold storage”. If a vaccine is successful, see them Melrose ((MRO), which generates a third of its sales from the sector through GKN Aerospace, as the main beneficiary as customers’ production plans increase Airbus (AIR.PA) and Boeing (BA.N). The stock had closed through Friday to halve this year, but has risen 17% since then.
In retail, good news about Covid-19 would be an addition WH Smith ((SMWH), primarily a travel business that saw sales decline 70% as coronavirus restrictions hit public transport passenger numbers. Peel Hunt analysts called the stock a “long-term buy” adding that summer was the key period “so that a vaccine would have a significant impact on short-term profitability over the next six months.”
Analysts believe a vaccine will slow down but not derail some consumer trends like online shopping and gaming. That could have some implications for video game companies like Team17 ((TM17) and Boundary developments ((FDEV).
However, the analysts argued that the online businesses hardest hit by consumers, such as retail, would continue to improve their positioning and gain market share.
“The fact that consumers can return to the high street with confidence will not reverse the importance of relevance. From our point of view, the opposite is the case, ”said Peel Hunt analysts.
That said, they expect a fast fashion retailer Boohoo ((BOO) and electronics specialist AO world ((AO) to continue to be strong. They expect the latter to end the year with 50% growth plus active customers, resulting in repeat purchases exceeding market expectation of 7-8% sales growth for the next year.
Analysts also tipped real estate investment trusts to invest in student accommodation in order to recover strongly. They recommended both of them Empirical student ownership ((ESP) and Unite group ((UTG), whose stocks are up 29% and 25% respectively this week.
Following Monday’s news, Jefferies analysts re-released an analysis in September of what to do if a vaccine arrives.
They would tip when traveling Jet2 ((JET2), which modeled a pre-Covid recovery recovery that lasted four years. In their free time they like Cineworld ((CINE), also valued very cheaply in relation to its pre-pandemic growth. Generator supplier Agrreko ((AGK) would also see a big boost if the Tokyo Olympics are reorganized next year. They withdrew BHP ((BHP) as the miner who benefits most from the commodities that would benefit from a recovery in demand.
With the arrival of a vaccine gold supplies Centamine ((CEY) and Polymetal ((POLY) would look threatened. The price of gold has risen this year due to uncertainty, but neither of them hedge their sales in the precious metal which generates 100% and around 86% of their respective revenues.
At retail, Ocado ((OCDO) may have popped up when a vaccine slows the channel shift to online grocery shopping. According to analysts, the company traded at an “unprecedented” rating, roughly 70 times its estimated 2022 enterprise value divided by sales, while other tech-only companies were rated between 20 and 30 times.
Discount stores B & M. ((BME) was a clear “Covid winner” but while some new customers would stay, there is now a higher downside risk if sales normalize after a vaccine.
The stock winners and losers from the vaccine breakthrough