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Markets catch vaccine optimism

— 1 minute read

The glimpses of potential COVID vaccines have given rise to investor optimism, lighting sparks for value and small-cap stocks that have lagged through the health and economic crisis.

Markets on Tuesday reacted to overnight news that a new vaccine protecting against COVID-19 from US company Moderna was nearly 95 per cent effective. 

It followed an earlier announcement from pharmaceutical company Pfizer, which had declared its COVID vaccine may be 90 per cent effective in stopping the virus. 

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Although the ASX shuttered early on Monday after it experienced technical difficulties, the S&P/ASX 200 reached an eight-month high when it returned on Tuesday, reaching 6,526.9 at 10:50am.

Similarly, the Dow Jones Index ended Monday 1.6 per cent higher to its highest point since March, while the S&P 500 had peaked for the year to date at 3,629.91. The FTSE 100 Index also rose to 6,421.29, its highest point in almost six months.

Tai Hui, chief Asia market strategist at JP Morgan Asset Management noted that the NASDAQ underperformed the S&P 500 upon the vaccine news, while growth style lagged behind value. 

“This is consistent with the growing consensus that sectors that are hardest hit by the pandemic should outperform when we finally get a sustained solution to the pandemic,” Mr Hui said. 

“This was also shown by the strong performance in energy and airlines overnight.”

Seema Shah, chief strategist at Principal Global Investors added the news was likely to “solidify the market rally that has been in play since last week”. 

“Visibility towards a return to normality is increasing and this should provide more fuel to the reflation rally, with small caps, value and cyclicals clear beneficiaries,” Ms Shah said. 

“Easy monetary policy, fiscal stimulus, recovering economic growth – there are many reasons for investors to be optimistic as we move closer to the end of this awful year.”

With its lower case numbers, Australia is decoupling from the rest of the world, although there has been a spike arising in Adelaide more recently. 

While other states have avoided a resurgence and Victoria has come out of the other side – state border controls are expected to be eased if the situation holds, particularly as the country enters the summer period, when seasonal factors may slow the virus spread. 

T. Rowe Price experts however have forecast that the Australian economy is still likely to see an uneven recovery, expecting it to suffer from the drag of international border closures for some time. 

AMP Capital Australian equities portfolio manager Dermot Ryan commented effective vaccines could bring the market rally to the streets and democratise gains for “real businesses who employ large numbers of people, rather than small profitless tech companies” which soared through lockdown.

“We also expect that dividend growth is going to come back strongly after bottoming in August this year, providing opportunity for strong franked returns for Australian investors,” Mr Ryan said.

Meanwhile, the effect of COVID may still linger for some time yet in other countries, with rising cases and deaths still occurring in the US and lockdowns taking their toll on economic activity throughout Europe. 

Yet investors appear to be looking past the more immediate outbreaks in the US and Europe, instead focusing towards a recovery and a potential vaccine delivery in 2021. 

“We may continue to get news on vaccine development in coming weeks, as other companies are due to report their findings,” Mr Hui said. 

JP Morgan analysts believe the global economy is in an early phase of the recovery cycle, with the company saying it is constructive on risk assets such as equities, corporate bonds and emerging markets debt.

“Equity sector rotation could dominate investor discussion in coming months and we think investors can look to diversify their allocations to take advantage of potential good news on vaccine development in sectors that have underperformed in the past six months,” Mr Hui said.

“By region, this suggests using the US, Asia and China, as core allocations for an equity portfolio and gradually adding Europe, Japan and EM ex-Asia to take advantage of their attractive valuations.”

On the other hand, eToro market analyst Adam Vettese has erred on the side of caution, commenting that the vaccine is yet to be submitted for approval, which may take weeks or months, and manufacturing volumes and distribution still need to be sorted.

“Until it is available for widespread use, then I expect markets to remain volatile and to reflect the general nervousness currently felt by investors,” Mr Vettese said.

“However, once – or even if – that happens, you can expect fresh rally in share prices, particularly for stocks in sectors most affected by coronavirus, such as oil, retail and travel.”

Contrarily, BlackRock analysts have warned that airlines may be potential losers through 2021 even with a vaccine, as business travel is only expected to recover slowly. On the winning side are large tech companies, which are expected to maintain their high margins under a divided US government. 

 

Markets catch vaccine optimism
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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