While Donald Trump’s refusal to concede this year’s US Presidential Election has generated significant political controversy, market watchers remain unperturbed about the prospect of political unrest. According to BOS Head of Investment Strategy Eli Lee, it is time for investors to reposition their portfolios for market re-opening in anticipation of a viable Covid-19 vaccine.
“The uncertainties related to the US elections are now mostly out of the way. As we have highlighted in our previous US election reports, President Trump’s odds of credibly contesting the results are low, and the outcome of Biden’s win with a likely split Congress presents many positives for markets,” Lee writes in a 16 November broker’s report.
With political intrigue stateside out of the way, markets are now taking heart at the impending arrival of a viable Covid-19 vaccine. Pfizer-BioNTech’s announcement that its vaccine showed greater than 90% efficacy with minimal side effects on 9 November has been a “major catalyst” for markets. Lee says that investors have switched their outlook from cautious pessimism to the realisation that widespread vaccine availability could come about within the next twelve months.
Consequently, the Dow Jones index soared nearly 3% upwards on 9 November as investors hurried to convert their technology counters into value equities. Many of such counters are currently trading at highly depressed prices. Lee sees airlines, hospitality and casino names as likely to benefit from a possible normalisation of economic activities ahead.
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“Prior to this surge in markets, we have executed a timely upgrade of our overall position in equities to overweight, and reduced our position in developed market investment grade bonds which suffered from the move up in the long end of the Treasury yield curve,” Lee writes. Clients have also been prepared for a switch from tech into value or cyclical plays, he adds - BOS has been advising clients to make the rotation for some time before the recent news.
Naturally, such a strong surge of bullishness is likely to be accompanied by some degree of retracement and fluctuations as the market looks to moderate expectations. These minor corrections, Lee notes, will likely be driven by drawbacks to the Pfizer vaccine such as the logistical challenge of having to keep them at -70 degrees Celsius temperature during distribution. Resolving such challenges could see some delay to general vaccine availability.
But Lee says that investors who are too fixated about these challenges risk missing the wood for the trees. Even if the Pfizer vaccine proves unsuitable to the task of putting an end to the pandemic, he points out, there remain over 40 candidates under clinical evaluation in humans, not to mention at least another 150 in pre-clinical trials. Results so far have proven promising.
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Government support has been unprecedented and in this desperate global race for a resolution to this year-long crisis. Regulators in particular have proven helpful in cutting red-tape and fast-tracking approvals to speed up the process. Most major economies have signed agreements with multiple candidates to diversify their sources of supplies, with drug-makers ramping up vaccine capacity to ensure that this demand is met.
“It is important for investors to separate noise from signals in markets. Significant price action on news - like what we saw on 9 November - tends to be meaningful. The unsurprising message is that vaccines are positive for markets, particularly for those stocks that will benefit from re-opening,” argues the Investment Strategist. Lee expects at least one successful candidate emerging and at least one major drug maker receiving regulatory approval by 1Q21.
In light of these developments, Lee sees long-term market risks easing significantly, especially with accommodative global monetary policy propping up risk asset prices. While some short-term market turbulence is expected owing to ongoing Covid-19 surges in the US and Europe, he says that BOS will look to be buyers should markets dip in response to these setbacks. Nevertheless, the investment strategist is convinced that the markets will fix their eyes on the impending end of this global plague towards the bright future of economic normalisation.
