Post Vaccine World

In recent weeks we have received the surprisingly positive news on three vaccine trials showing more than 90 per cent effectiveness. This indicates a likely return to some level of normality in 2021. I wanted to share how this development will likely impact the investing landscape and the sector themes to look out for.

I have read two research reports from UBS Asset Management (UBS) and Antipodes Partners (Antipodes) that provide insights on how vaccines with higher than expected effectiveness will impact markets and the global economy.

UBS state the speed of economic recovery will depend on the effectiveness of vaccines. Recovery will also depend on how many of the vaccines can be produced and the percentage of the population that takes up the vaccine. UBS expects most advanced economies to have herd immunity by the second half of 2021 which would indicate a swifter economic recovery and a risk on investment preference.

Economic and Investment Implications

UBS indicated that low interest rates and a vaccine make it a conducive environment for investing and made the following points:

• They favour smaller and medium sized companies over larger companies;
• They also favour value investment style over growth;
• The US dollar is likely to continue to depreciate;
• The probability of a worst case economic scenario where an effective vaccine would remain elusive for an extended period has now been significantly reduced.

Antipodes also believe there will be a rotation towards value and away from more expensive growth and defensive companies. Value style tends to favour companies which have lower share prices compared to financial indicators like earnings and believe the market has mispriced these companies. Growth investing style prefers companies whose earnings are expected to increase at a rate that is greater than the overall market and these include but are not limited to technology companies.

Sector Themes

As economies recover, value style investing has historically done well. Industry sectors that would be expected to perform well include following:

• Commercial property – workers in greater numbers begin to return to offices and malls reopen. We prefer commercial property investments that have high quality tenants with long WALE (weighted average lease expiry);
• Travel – pent up demand, in particular for leisure travel, as borders reopen; international travel will likely lag domestic travel until effective vaccines are distributed around the world;
• Energy – oil prices likely to have a modest bounce from current levels favouring energy producers. There will be a greater focus on renewable and green energy going forward as costs to produce alternative sources of energy reduce;
• Banks and financials – Banks are generally seen as a barometer for economies. However banks’ profit margins are reduced in a low interest rate environment. We prefer financials that do well in a low rate environment.
• Education – expected to recover once international student arrivals start to recover. We are also likely to see a greater trend towards online education.

In addition, we see emerging market equities and currencies to do well going forward. Emerging markets tend to perform well when economies recover and global demand improves. Many emerging market currencies were heavily sold off during Covid with some hitting record lows and we expect them to appreciate over time.

Conclusion

We are overall bullish on markets given the low interest rates and stimulatory fiscal policy. We still however expect periods of episodic volatility in months ahead due to factors including transition of US presidency from Trump to Biden, Brexit negotiations and potential setbacks on distributing vaccines.

From an investment portfolio perspective, we invest with fund managers that either have a value style, have a small or mid cap bias or invest in emerging markets. We can also directly invest in many of these companies. Please contact your adviser if you want to discuss any of these options further.