It was only a few weeks ago that the UK put the clocks back and entered a second period of lockdown, accepting both the physical and metaphorical darkness that accompanies those actions. Since then we have seen some light in the form of the US elections and Covid developments, leading to some interesting reactions in equity markets.
As the UK government finalises its Covid guidance for the festive season, other nations are also taking stock of their situations. In France, where restrictions have been tight for a number of weeks, the number of new cases is falling and it looks like restrictions will be relaxed, much to the relief of beleaguered retailers who have been lobbying the French government on the issue. The World Health Organisation has expressed some anxiety about the prospect of loosening restrictions in Europe, stating that this should not happen unless the number of cases is consistently low. It’s easy to understand the WHO’s concerns: After getting the first wave of Covid under control, Europe didn’t have the necessary infrastructure ready in the summer to head off a second wave. Without adequate test and trace infrastructure, Europe could be facing a third wave next year. A valid point, but one that seems likely to be overlooked since the WHO’s credibility is low and no government wants to be remembered for, quite literally, cancelling Christmas. Conversely, in Asia, South Korea is warning of possible tighter restrictions to help tackle a small but persistent increase in cases.
Good tidings have emanated from Pfizer, Moderna and Oxford University, with each firm reporting success in Covid vaccine trials. Unsurprisingly, this news was welcomed by equity markets, prompting a recovery in some out-of-favour names including airlines, oil, banks and cruise operators. As investors began to see a path back to restoring earnings in these economically sensitive businesses, there was a rotation away from some of the firms that had been thought to benefit from the crisis including manufacturers of cleaning products and the technology firms that have been safe bets up until now.
While this is undoubtedly good news, have investors got carried away? It is true that there are still hurdles these vaccines need to clear both in terms of how well they function and how quickly they can be distributed. For example, it is not yet known if vaccinated people would still be able to spread Covid to unvaccinated people, how the vaccine performs across different age groups and for how long it will be effective. There are also logistical concerns that, even if the vaccines could be manufactured instantly, there may be shortages of syringes, vials, and medical personnel to administer the vaccines. In the case of the Pfizer vaccine, the need to store it at ultra-low temperatures may make it an expensive / impractical choice for some countries.
The prize for success is considerable, with some estimates suggesting global economic growth in 2021 might be 7% if a vaccine is available early in the year, compared to 5% without a vaccine. There are also a further six vaccines in development that are close to announcing results and a pipeline of another 300. Some of those will fall by the wayside, but it looks likely that doctors will have several different vaccines and therapies available next year. The toolkit for tackling Covid looks likely to be robust and that should support economic growth and, ultimately, equity markets over the coming months.
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