How is COVID-19 is affecting global securities? In 2020, COVID-19 had an extreme influence on the world, including the world’s economy and financial markets. Despite the powerful development of vaccines, coronavirus will continue to hinder progress in 2021.
It seems like the world is now on the cusp of the devastation wrought by the virus and the prospective re-emergence of a healthy economy. But that does not imply that everything prior to this was catastrophic or everything coming will be positive.
Initially, near-term medical aid expectations were low as, despite years of trying, no coronavirus inoculation had been successfully grown. COVID-19 forced the rushing of a typical 10-year medication development cycle into only 12-18 weeks was unprecedented.
The development of COVID-19 vaccines has been massively accelerated
Even as late as September 2020, an article published on Bloomberg highlighted the challenges that remained:
“To deploy a vaccine widely by early next year, many things must go right. One of the vaccines has to work. The vaccine that works has to be one of the handful that are already in late-stage trials. There can’t be a major safety concern or delay. Clinical trials have to generate strong evidence. The FDA [the United States Food and Drug Administration] has to accept that evidence and review it rapidly. Manufacturing must go near perfectly. Hundreds of millions of doses must be delivered around the country, likely with some degree of low-temperature storage requirements.”
What will happen next in the world’s different economies?
It is tempting to assume there Should be some form of mean reversion in 2021, with the economies that fared the worst in 2020 bouncing back the most Strongly, while the ones that displayed endurance could be relative laggards forward. However, this could be a far too simplistic an assumption.
When bringing together variables such as access to COVID-19 vaccines, lockdown severity, 2020 growth forecasts, universal health coverage, coronavirus deaths, and cases, it’s possible to construct standings such as Bloomberg’s COVID Resilience Rankings. Adding 53 economies valued at around US$200bn, this shows that nine of the top 12 countries are out of Asia and Australasia. The US ranks 18th, the UK 28th, while the bottom three spots are filled by the Latin American countries of Peru, Argentina, and Mexico.
While the UK and US could have done a far greater job at managing the pandemic, the two countries will be at the forefront of this vaccination wave. They may see large numbers of their inhabitants inoculated sooner than in other countries. Together with Canada and China, each country has agreements with vaccine makers who have undertaken stage III trials, followed closely by India, Japan, and Indonesia.
Which factors could create head and tail winds in individual economies?
Two key considerations that will affect individual economies are 1) speed of access to the vaccine, and 2) the willingness of a country’s population to be vaccinated.
- Speed of access
The rate of access to this vaccine around the globe will fluctuate widely, with many developed countries benefiting from deals with vaccine-producing companies. E.g., France might be negatively affected by a widespread unwillingness to take a COVID-19 vaccination, but it will gain from early vaccine accessibility.
- Willingness to be vaccinated
We are seeing a substantial divergence in enthusiasm for a vaccine across the world. Just 54% of French poll respondents reported that they’d accept a vaccine when available, while the US also rates poorly by this metric with 64%. At the opposite end of the spectrum, over 80% of Indian and Chinese respondents showed they would take it, whereas the UK stands somewhere in the middle with slightly over 75%.
There are many reasons cited for hesitance around the vaccine, including concerns about side effects, wariness the clinical trials are rushed, and a feeling that the chances of contracting COVID-19 are low. There are many reasons cited for hesitance around the vaccine, including concerns about side effects, wariness the clinical trials are rushed, and a feeling that the chances of contracting COVID-19 are low.
The Bloomberg article quoted above went on to explain:
“Getting Americans to take it may also be a challenge. For the 2017-2018 flu season, just 37% of Americans got a vaccine, according to the CDC [the Centers for Disease Control and Prevention]. And the flu vaccine has been around for decades, and not been anywhere near as much of a political lightning rod.”
Survey: ‘If a vaccine for COVID-19 were available, I would get it’ (% agree)
A positive outlook for equities
The growth of a coronavirus vaccine is positive for equity markets, allowing for the headwinds we discussed previously. With no vaccine, economic activity and corporate profits could continue to be constrained by social distancing and mobility restrictions. The US S&P 500 is expected to see a moderate quarter-on-quarter% decline in earnings from the fourth quarter of 2020 before reporting accelerating growth as 2021 progresses.
Consensus forecasts[I] pointed to this even before the vaccine data was published, which implies the news was already discounted. As a result, the larger question relates to internal market dynamics, principally the rotation between growth and value shares.
What are growth and value stocks?
Investors searching to get ‘value’ seek out stocks which they believe have been undervalued by the market and are investing for less than their intrinsic worth. ‘Value stocks’ are seen as trading at a lower price than warranted when measured against metrics such as earnings, profit margins, or sales.
‘Growth stocks’ are shares in firms that the investor expects can grow at a faster rate than the total economy, other industry segments, or their opponents, and that are expected to deliver greater corporate profits in the future as an outcome. These stocks often don’t pay dividends since the company prioritizes reinvesting its earnings back into the business to help this growth trajectory. Frequently, stocks in these kinds of a company would be seen as over-valued’ by a value investor as the share cost comprises an estimated premium in recognition of the expected faster growth rate.
Value vs growth
Immediately after the announcement of this first successful phase III Trial by Pfizer and BioNTech on 9 November 2020, stocks, measured by the Russell 1000 Value Index, meaningfully outperformed the Russell 1000 Growth Index.
Even though there’ll be a commonality, not all growth stocks may be defined As COVID winners. It could be expected that the value rally has further to run as those businesses which were amongst the worst hit by the coronavirus disturbance will benefit the most from a continued return to economic normality.
We believe value stocks will perform well in 2021. They generally perform well during an economy that is still recovering and if longer-term interest rates have been rising more rapidly relative to shorter-term rates. Both conditions may reasonably be anticipated in 2021, and the growth to value rotation is very likely to persist in 2021.
There are likely to be many value traps’ within these regions. These are cheap stocks for a reason and could become even more economical, developing a deceptive illusion of value.
Similarly, certain growth areas have not shared in the overall outperformance of growth stocks, driven by large technology firms and businesses benefiting from the staying at home environment. These growth laggards could include the healthcare equipment Sub-sector of this S&P 500, which hardly kept pace with the wide index through 2020 as elective surgeries were postponed. These sectors have space for Earnings growth in 2021, even if they are nominally termed as stocks.
Another day, another declining dollar
We could expect to see the other significant development in 2021 is a continued decline in the US dollar. The US dollar typically acts as a counter-cyclical money; it weakens as economic growth accelerates and vice versa. It is also a safe haven during times of stress and was a significant beneficiary of March’s coronavirus induced panic.
Fear has moderated, and an economic recovery is expected in 2021. Therefore it is reasonable to expect the US dollar to stay under pressure. Meanwhile, the US Federal Reserve will continue to offer as much monetary support as required.
Therefore, investors should carefully track their exposure to the US dollar and consider moving their portfolios back to their base currency or increasing their vulnerability to non-US dollar currencies.
Asia’s response and resilient recovery
The economic impact of the lockdowns Driven from the pandemic meant that only five economies are expected to have reported economic growth in 2020. Chief amongst these is China due to its strong reaction to the virus. The country employed mass testing from an early stage, enforced a compulsory 14-day quarantine for travelers, and exhibited a strong willingness to execute stringent lockdowns in the very first indication of a virus epidemic.
According to the Bloomberg Resilience Rankings, many Asian countries have Handled the pandemic entered and well in 2021 in reasonable financial shape. As 2020 brought to a close, it was evident that many Asian currencies exhibited strength, partly courtesy of the weak US dollar.
Equity valuations in Asia are trading at a significant discount to other Regions, particularly the US, and we, therefore, anticipate outperformance by the Asian stock markets in 2021.
In summary, as we look towards 2021, we expect:
- The US dollar to continue trending downwards.
- Asia and China to lead the way economically, helping the Asian stock markets to outperform
- The growth to value rotation to persist
