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Markets will mirror vaccination success

Markets will mirror vaccination success

08-01-2021 | Monthly outlook
Vaccination rates acting as the key to ending the Covid-19 crisis are seen determining market success in early 2021.
  • Richard Purkiss
    Portfolio Manager

Speed read

  • Optimism as vaccinations begin countered by massive spike in cases
  • Equity markets may start to reflect domestic inoculation figures
  • Risk taken off the table but base case for rising earnings remains

Countries began inoculating their populations in December after the Pfizer/BioNTech vaccine was approved. Other vaccines are now being rolled out across the world, just as a new wave of lockdowns have been brought in to stem a rising tide of Christmas holiday infections.

The success that countries have in their vaccination programs, seen as offering the best way out of the lockdowns and the economic damage they have caused, may become reflected in domestic equity markets, Robeco’s investing and health care experts say.

“Throughout 2020, a key theme for equity investors globally was closely tracking new Covid-19 infections at a country level, which certainly correlated with sentiment shifts in local equity markets,” says Jeroen Blokland, Head of the Multi-Asset team.

“Although investors will no doubt continue to monitor infection rates this year too, we think that vaccination rates will be by far the most important barometer of equity market sentiment in 2021.”

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Back to square one

Excitement over the first vaccinations has been tempered with a huge spike in infections that has proved to be worse in places than the initial wave in March 2020. “We’re only a few days into 2021, and yet the prospect of a full return to normal by the autumn already appears to be vanishing over the horizon, unless governments everywhere quickly galvanize public health efforts to vaccinate their populations,” says Richard Purkiss, portfolio manager with the Global Equity team and a qualified medical doctor.

“What’s especially disappointing about this prospect is that we witnessed a ’superhuman’ cooperative effort from medical researchers and pharmaceutical companies to produce not just one but several effective and safe vaccines in quantities large enough to begin to meet the challenge of this pandemic in record time.”

“Yet, we then saw ‘pedestrian’ early vaccination rates by health care agencies in all but a few countries where vaccines have now been approved, suggesting that a return to normal by the end of summer is already looking highly improbable.”

Huge spike in cases

The latest Covid-19 figures are scary. Confirmed infections globally now stand at more than 85 million, and estimates of the likely true infected numbers (including all the unconfirmed or silent infections) are somewhere between 5-10 times greater. That represents around 5-11% of the world population, and presents a major logistical challenge for health authorities, not least as all five currently approved vaccines require two doses, given three weeks apart.

“To be relatively certain of avoiding most of the worst economic impacts of the pandemic by the end of September, the global vaccination rate would need to reach 30 million per day for a vaccine that requires two doses,” says Purkiss.

“Our estimate assumes that herd immunity would begin to kick in at the 70% level of vaccination or infection in the population. This could be relatively optimistic, particularly if either of the recently identified and apparently more transmissible UK or South African variants were to become dominant strains worldwide over 2021.”

The key Covid-19 vaccines and their timelines. Source: Bloomberg Vaccine Tracker, January 2021.

Will more strains beat the vaccines?

Then there is the issue of newer or stronger strains emerging that could prove a challenge for the vaccines’ efficacy. “Even assuming vaccine-resistant strains don’t emerge over the next 12 months, most national strategies will probably still struggle to meet their vaccination targets across the year,” Purkiss warns. “As a consequence, it now seems likely that a significant part of the world at least will still be facing many of the same difficulties and economic restrictions in the first half of 2022.”

“Moreover, given how widely spread this coronavirus now is, it is likely to become endemic, and hence vaccine-resistant strains are likely to emerge at some point in the not so distant future. So, continued close surveillance of this virus will still be required even after this pandemic fades, and the need for updated versions of these newly-approved vaccines is not likely to disappear either, unless we want a repeat of 2020!”

Taking risk off the table

For investors, it means taking a much more cautious approach until there is more clarity, says Blokland, whose team has been taking risk off the table since the severity of the latest outbreak became known.

“As we emphasized in our 2021 Outlook (among other publications), the path to a new normal is likely to be rocky, and hiccups in the distribution of vaccines are to be expected,” Blokland says. “As we received more information on the massive challenge the world is facing to reach herd immunity in recent weeks, we reduced the overall risk exposure of our portfolios late last year.”

“The already formidable task for the vaccine – to build a bridge between the current slowdown and better times later – has become even harder. With equity and corporate bond markets already anticipating better times, rising to new all-time highs in the meantime, the odds of a temporary setback have increased. Hence, we have reduced the weight of these asset classes to neutral.”

Earnings can still recover

However, there is still the prospect of ‘jam tomorrow’ as company earnings recover, backed by continuing stimulus programs while the lockdowns are still in place, he says.

“At this point we do not believe there is enough reason to deviate from our base case scenario – that we continue to believe that massive fiscal and monetary stimulus will allow the global economy to resume its recovery,” Blokland says.

“In this scenario, company earnings are expected to rise by at least 20% this year. Given where equity valuations currently are – high in absolute terms but attractive relative to other asset classes – earnings growth will be the main driver of equity returns, pushing markets higher.”

“However, recent developments regarding both the virus as well as vaccination are hampering visibility on when the recovery will actually resume. This bodes for a more neutral stance in our multi-asset portfolios for now.”

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