Tuesday, December 22, 2020

What will stock markets look like beyond COVID-19?






The game has changed. The stunning news in November that Pfizer and BioNTech had developed a vaccine that was more than 90% effective in preventing COVID-19, looked to be a major first step in the world returning to normal after the coronavirus pandemic devastated lives and economies through much of 2020.

Markets certainly thought so. News of the vaccine gave a massive boost to stocks that had struggled through the pandemic, particularly in sectors such as oil, hospitality, and travel and tourism. Some markets even pushed to record highs.

S&P 500 Sector Reactions to Announcement of Pfizer/BioNTech Vaccine

News a week later that Moderna had also developed a vaccine sent stocks soaring once again and further gains can be expected if and when other vaccines are announced. Most vaccines currently being developed employ a similar revolutionary technique in which COVID-19’s genetic code is injected into the bloodstream to train the body’s immune system to attack the virus’s cells.

Post-COVID-19 market boost may take some time

However, there is still a way to go before we can be confident that the COVID-19 age is over and the virus no longer has such a dramatic impact on markets. The S&P 500 Index plunged over 6% across two days in February after Italy announced its first large-scale lockdown and the Trump administration asked Congress for USD 1.25 billion to defend the US economy. The index plunged a further 7.6% in March after COVID-19’s stifling of trade and travel led to a plunge in oil prices, then 9.5% two days later when the World Health Organization (WHO) declared the virus a pandemic, and two days after that plummeted 12% after the US declared a national emergency. When US negotiators struck a deal on a USD 2 trillion coronavirus rescue package less than two weeks later, the index shot up 6.2%.

The end of COVID-19, if it comes, will likely see an end to such huge market movements, but the pandemic will be with us for some time yet and the economic, social and political fallout will play out over years. Even after the Moderna vaccine announcement seemed to confirm that the light at the end of the tunnel was very bright indeed, the US market pulled back just the following day after consumer spending data came in weaker than expected and coronavirus infections continued to rise.

The small correction served as a quick warning that there will be much to consider before investors can begin rejigging their portfolios for the post-COVID-19 age.

Vaccine raises as many questions as it answers

The first thing to consider is the vaccine itself. There are many hurdles still to overcome. How quickly can the hundreds of millions of vaccines the world will need be rolled out? Who will get the jabs first? Should it be the most vulnerable such as the elderly or those with pre-existing conditions or younger, work-age people who can more quickly pull economies back into shape? There is also the question of how safe the vaccines are, whether there will be any longer-term ill effects, whether they prevent spreading the disease as well as contracting it, and how long the immunity will last. The answers to these questions may only be revealed over time, possibly years, and every bit of good or bad news will have its effect on markets.

Beyond the details of the vaccines used, another prime consideration for investors is which market sectors are most likely to push back higher through a post-COVID-19 recovery and which are most likely to lose any gains they may have made. On the face of it, this is simple enough. Those that have gained will fall and those that have lost will recover, but the harder part for investors is guessing how much permanent change will result from the pandemic.

Some sectors have quite clearly done well out of the pandemic. Pharmaceuticals – particularly those developing vaccines – have been among the winners, as have tech giants such as Amazon, Facebook, Google and Microsoft, and any other company offering services such as online shopping, videoconferencing or media streaming to the world’s millions of locked-down consumers. Other sectors have been hammered. Hospitality, travel, tourism, logistics, and oil and gas have all seen business incomes slashed and share prices plummet.

When the recent vaccine announcements were made, these sectors all reversed direction, but then in the next-day corrections that followed, they resumed the trajectories they have followed since the pandemic broke.

Impact of global lockdown could be felt for some years

However, although the end of COVID-19 suggests that the losers will recover and the winners fall back, things may not be quite that simple. There are a number of other important factors to consider when investing in post-COVID-19 stocks. The most important consideration is to what extent changes necessitated by the great lockdown, such as working from home rather than the office, may outlast the pandemic or even be permanent. Although we can be sure that there will be a large-scale return to work in 2021 if the vaccines live up to their promise, we can be less sure of the proportion of workers that will return to their office desks.

Companies will have had the opportunity to balance any loss of productivity from work-at-home with savings on office space and expenses, and will each make their own assessments of how much work to leave permanently at home, how much to leave flexible, and how much to bring back to the desk. These decisions will impact not just the future stock prices of companies such as those providing videoconferencing services, but also those involved in transport to and from the office and others such as hospitality catering to those working in the towns and cities where the offices are.

A longer-term impact from the videoconferencing boom may be on airline stocks. Companies struggling to survive the pandemic and the potentially long recovery will be likely to cut back on expensive business travel in favour of very inexpensive videoconferencing, and though business travel accounts for just a small proportion of airline passengers, it frequently contributes more than half of profits. Hotels will also continue to suffer from any longer-term cutback in business travel and may need to reinvent part of their operations, such as offering rooms as short-term office spaces.

The coronavirus pandemic has also had a big impact on business supply chains. The lockdowns imposed around the world in March and April left many businesses scrambling to source new supplies and the shock of the turmoil this caused may well persuade many that it is better to rely on fewer suppliers and closer to home. This has already had a dramatic impact on global trade, so much so that the price of oil tumbled along with demand and is still well short of its levels at the start of the year.

Economic fallout of the pandemic remains highly uncertain

Another factor that will weigh on markets for some time to come is the long-term economic impact of the 2020 lockdown and the vast stimulus packages introduced by governments around the world, as well as the seemingly interminable low interest rate environment. The stimulus measures may have done much to keep stock markets pushing to ever-new highs even as the pandemic raged but their unwinding may have a very different effect. The economic future remains highly uncertain, but it seems highly unlikely that recoveries will be as rapid and V-shaped as many hope. This is likely to weigh on consumer discretionary stocks for some time to come as people put off buying anything too expensive and inessential until they feel more financially safe.

One sector that may continue to prosper in the wake of the pandemic is the green sector. COVID-19 has shown if nothing else just how much damage the natural world can inflict in even this technologically advanced age and this has added further impetus to the determination to tackle climate change. Just as more good news on a new COVID-19 vaccine was being announced out of Oxford in England, the UK government was announcing that there would be no more sales of fossil-fuel driven cars after 2030 and that climate risk disclosure would be mandatory for major companies after 2025.  

Though risks remain, there is much room for optimism

There is much to think about, but it now seems clear that after investor portfolios were de-risked earlier in the year there will now be another major reweighting of portfolios to adapt to whatever the post-COVID-19 age will look like.

Although many risks remain, so too does room for optimism. Even after all the bad news the world has endured through 2020, the speed at which the revolutionary new vaccines have been developed has been truly remarkable, and businesses big and small have proved themselves exceptionally adaptable to whatever is thrown at them. Many of the economic data released over the past six months have come in better than expected.

The world may also be a little calmer and thus better equipped to deal with the post-COVID-19 challenges if Brexit can finally be resolved by the end of the year and the new US president Joe Biden is able to rebuild relationships with global institutions such as the WHO and the Paris Agreement signatories, as well as improving ties and trade between the US and China.