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So Pfizer announced a vaccine last night – with reported 90% efficacy.
This news sparked a massive rotation out of the pandemic winners (tech, industrial REITs, growth etc) and into the pandemic losers (value stocks, energy, airlines, hotels, banks etc).
3 thoughts from me:
1. Vaccine is not a holy grail
A lot of these deep value stocks (banks, airlines, hotels, real estate etc) have sold off crazily, trading at historical discounts to growth stocks. So short term, a massive snapback like this was always bound to happen – we just didn’t know the timing, or the catalyst.
It’s why it’s super dangerous to short stocks in a bear market, you never know when you get a rally like that that rips your face off.
But looking at the news, and actually thinking about it, makes me skeptical as to whether this vaccine is going to be the holy grail markets are pricing in.
Let’s look at the key factors:
Pros
- 90% Efficacy – I agree that a 90% efficacy is amazing news. A higher efficacy means that less people need to be immunized to achieve herd immunity. For example – If 50% of the population must have immunity for herd immunity to kick in, a 60% efficacy vaccine would require vaccination of 83% of the population. With 90% efficacy, it’s 50 – 55% of the population. So this is really good.
- Bodes well for other vaccines – If Pfizer can get 90% efficacy, it would indicate that this is a virus that lends itself well to vaccination. It indicates that the other vaccines in the pipeline may achieve similarly impressive results.
Cons
·Safety checks to be cleared – Before the vaccine can be used, it needs to get regulatory approval. This will definitely be fast tracked like nothing we’ve ever seen, but we’re still looking at at least a month or two before it’s approved for widespread use. Perhaps Dec 2020 if all goes well.
·Production is a challenge – 2 doses are required for this vaccine (booster shot 3 weeks after the first). Pfizer indicated they can get 30 – 40 million doses out by end of the year, which will vaccinate 15 – 20 million people. They also indicate that they can produce 1.3 billion doses a year. But the number don’t add up. Even if we use a more aggressive production schedule, and assume other vaccines come online, we’re still looking at Q3/Q4 2021 before large chunks of the world are immunised.
·Logistics is a challenge – Pfizer’s vaccine requires storage at -70 degrees. This requires assembly of a global cold supply chain, which is a formidable task.
Given the consequences at stake, I have no doubt that mankind will be able to solve all of these issues, no matter how big the cost / effort. The vaccine will be cleared, mass produced, and the world immunized. It will be a big win for humanity.
But we need to be realistic about timeline. Producing 2 – 3 billion doses of vaccine, distributing it and immunizing the world, will take us at least until Q3 2021.
This means that COVID controls and lockdowns are going to remain in place at least for the foreseeable future. No government wants to be the first to let foreigners in – until they can confirm that the other country is clean.
Just like how government bureaucracy meant there was a time lag until the COVID lockdowns were implemented, the same bureaucracy will mean that there is a time lag until the restrictions are removed.
Politicians are not risk takers – they will err on the side of caution.
Base case for me, is that we’re still looking at perhaps 6 to 9 months of COVID controls – depending of course on the country in question.
2. The economy will not recover overnight
And every day that the lockdowns persist, the economy continues to deteriorate. Every day it continues, there is structural damage to the economy, that won’t recover overnight even when COVID goes away.
Think about the closed Robinsons, the workers laid off and replaced by automation, consumers moving to ecommerce etc. The economy will take time to heal.
Case in point – the US GDP numbers are set out below. We’ve had a massive recovery from Q2, but we’re still a long ways below pre-COVID. Even after the big recoveries we’re still looking at 5 – 7% GDP declines for most developed economies this year. In any other year, that would have been a financial crisis.
So it will take some time for the real economy to recover.
The exact pace will depend on how much fiscal stimulus we see from governments.
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3. Mid term outlook doesn’t change significantly
And I guess the point I’ve been building to, is that I don’t think the mid term outlook changes significantly.
The main doubt up till now was the efficacy level of a vaccine. No one knew if it would be 60% or 90%. This matters because it affects the timeline to vaccinate the world.
And it turns out the number is towards the higher end, which is fantastic news.
But a lot of the underlying problems are still there. Namely:
- Short term the economy cannot reopen fully, making it hard to recover to pre-COVID levels of activity.
- Massive debt overhang for the developed economies
- A decade of slow growth and underwhelming inflation
- Ageing population in Europe and Japan
- Pension funding crisis in Europe and US
These are structural problems, and the vaccine solves none of these. These problems were already in place pre-COVID, we just didn’t know what would set them off.
I continue to think that the solution is massive government spending, funded by central banks keeping interest rates at close to zero (or buying bonds). You couldn’t justify something like that previously, but COVID-19 is the perfect cover.
So I actually think COVID is going to be used as the justification for these massive spending programs.
Very similar to how the 1940s played out, where big government spending was met by Feds keeping interest rates artificially low. The only difference here is that COVID is the reason instead of WWII.
So I don’t think the vaccine changes the mid term outlook.
But it does inject some much needed reality into markets. We were at a point where Zoom had a bigger market cap than Exxon Mobil.
I mean really? Are we going to be working at home for the next 10 years?
My views on the broad asset classes
A couple of you have also asked for my latest views on the broad asset classes. I’ll summarise quickly here:
Precious Metals (Gold, Silver, Bitcoin)
My main worry was that after the post-March rally, it was bound for a short term correction.
We seem to be going through that correction now.
But mid term, I am still pretty bullish on this asset class, I think the medium term solution here is inflationary in nature. And interest rates at the zero bound means bonds are no longer a good hedge. I may use any short term sell off to add to positions.
Deep value stocks (energy, airlines, real estate, banks)
I’ve said many times on this site that I see the greatest opportunity in this segment. Many of them are trading at historic discounts to book.
BUT – It’s very important to pick the right winners. I think a lot of them may not get through to the other side. But this also means greater opportunity for those that do. Pick those with a solid balance sheet / backing that will allow them to get through this crisis, and emerge stronger on the other side.
Personally I like energy, high quality banks, and well located high quality real estate (retail and office). I am not a big fan of airlines or hotels just yet.
Technology
As shared over the weekend, still bullish longer term. But valuations are important too. Some of those new IPO stocks trading at more than 100 times sales are very questionable to me. But for those at reasonable valuations, and solid business models, I think a sell off would be an opportunity to add. A Biden presidency reduces the risk of anti-trust action, which is a very big tail risk for Tech.
If I missed any asset class out, just leave a comment below and I’ll share my views!
Note: This article is a premium article that first appeared on Patron. Making it available given the interest on this topic today.
If you enjoy articles like this, do consider supporting Financial Horse and getting access to premium articles, my personal stock watch list, as well as my personal portfolio allocation.