It may be premature to cancel the Zoom Christmas party. But survivors of countless Covid-19 virtual quizzes and team meetings would be forgiven for indulging in schadenfreude in seeing shares in the video-conferencing company few had heard of a year ago slump 17 per cent on Monday as it emerged a vaccine prospect had surpassed expectations.
Investors in some of the hardest-hit sectors this year – including the travel, hospitality and banking industries – also likely got a kick out of seeing Netflix, Amazon and other stay-at-home stocks get pummelled as pharma giant Pfizer and its German partner BioNTech reported that their coronavirus vaccine candidate was more than 90 per cent effective in late-stage clinical trials.
The breakthrough turbo-charged a rally that had already been under way in European and Asian trading after Joe Biden was called by US television networks over the weekend as the country's president-elect. The Dow Jones Industrial Average would soar as much as 5.7 per cent to reach an all-time high on Monday. However, the Nasdaq Composite, dominated by high-flying technology stocks that had spearheaded a rally by global shares over the past eight months, ended the session in negative territory.
The vaccine the world has been waiting for is known as BNT162b2 in the scientific community.
"A name like that just rolls off the tongue, doesn't it? But experts are fairly unequivocal that its effectiveness is better than they expected – and it's also, clearly, better than what markets were hoping for," said Dan Moroney, an investment strategist with Brewin Dolphin in Dublin.
“In order for the bull run in markets to be sustainable, it can’t just be driven by the likes of tech and working-from-home stocks. The surge in recent days by the cyclical stocks that have been really affected by the pandemic – like airlines and retailers – is indicative that we are nearer to the end of the pandemic than the beginning. And that’s good news for everybody.”
The vaccine, expected to be rolled out from mid-December at the earliest, subject to regulatory approvals, will not come soon enough to stall the current second wave of the virus that is spreading at speed across Europe and north America. This has capped investor enthusiasm for equities since Monday’s sharp rally.
Italy, Europe’s initial epicentre of infection earlier this year, saw its total number of cases breach the 1 million mark this week as the continent’s death toll exceeded 300,000. The US is setting new records for infections almost on a daily basis, with total fatalities caused by coronavirus having surpassed 240,000, the largest number in the world.
However, Moroney said the election of Biden will result in a US president, from January, who will likely help the world’s largest economy ahead of a widespread vaccination programme by pushing for more high-speed Covid-19 testing and encouraging mask wearing and social distancing.
Biden will also be better, on the whole, for global trade, he said. “I wouldn’t, for example, say Biden’s going to go soft on China. But it’s clear that he’s looking to rebuild relationships with old allies and strengthen global institutions. US trade policy, regardless of what specific measures are taken, will, on balance, be much more clearly considered,” he said. “We will no longer see very significant tariff decisions being communicated on Twitter.”
Goldman Sachs equity strategists said in a report published this week that a vaccine is a more significant development for the economy and markets than the prospective policies of a Biden administration.
Rollercoaster ride
The vaccine news “will allow society to gradually normalise during 2021”, Goldman said as it raised its forecasts for the S&P 500 US shares index, which sets the tone for equities globally. Its new targets point to about 4 per cent upside for the index for the remainder of the year – followed by a 16 per cent surge in 2021 and 7 per cent gain the year after.
The overall 10 per cent gain by the S&P 500 so far this year, however, masks the rollercoaster ride since late February, when global markets succumbed to a violent sell-off as Covid-19 spread globally, prompting an economic shutdown. This led to massive stimulus programmes by central banks to avoid financial chaos, and a strong markets rally.
"The divisive US presidential campaign was actually a backdrop to the main event: a public health crisis that has tragically claimed 240,000 lives in the US since it began," said Goldman Sachs analysts led by David Kostin. "However, within less than a year, a vaccine has been discovered. The previous record for the fastest time to develop a vaccine occurred during the late 1960s when it took four years to develop a vaccine for the mumps."
Equities investors struggled in the run-up to the US election to make up their minds about what kind of outcome they wanted, with markets vacillating as they weighed polling data, according to Kevin Quinn, chief investment strategist at Bank of Ireland.
"Some months ago, the market seemed to want a Republican victory for historic reasons," he said, referring to the conventional Wall Street wisdom that the party is more pro-business. "Then it shifted to a Biden presidency and split Congress. Just prior to the election, it was all about a blue wave [of the Democrats taking the presidency and Senate and holding the House of Representatives] and pushing through a large stimulus package."
Still, markets have hailed the outcome, he said, with the Republicans on the cusp of retaining control of the Senate heading into run-off elections in January to determine two key Georgia seats.
Corporate tax cuts
First, it has removed general uncertainty surrounding the presidency – notwithstanding Donald Trump’s failure, to date, to concede defeat. Second, political analysts and economists largely say that some sort of US stimulus compromise – not far off the $2.2 trillion (€1.9 trillion) package House Democrats approved last month – will be reached early next year. And third, a divided government reduces the threat – for markets – of Biden reversing Trump’s corporate tax cuts and pushing through major policy changes in areas like healthcare and climate change without bipartisan input.
"A lot depends on the make-up of the Senate and whether it dilutes the Biden agenda," said Eugene Kiernan, an independent investment consultant in Dublin. "However, my experience has been that a bit of gridlock ain't necessarily a bad thing."
While a successful vaccine – or potentially multiple vaccines – should give global gross domestic product (GDP) a shot in the arm next year, economists and business leaders say it will take time to restore activity to pre-pandemic levels, given the scale of disruption.
"I'm not pessimistic. Eventually we'll get through this. But we should not be under the illusion that it will happen fast," UBS chairman Axel Weber told business news channel CNBC this week. "It would be at least a year to go back to pre-crisis levels of GDP. It'll take another year or two to be anywhere near getting unemployment and pre-crisis growth [rates] back."
But if the pandemic has not fundamentally changed business and the global economy, it has accelerated trends, such as the digitalisation of the economy and the green agenda, according to analysts.
“A lot of people who’ve been around a while baulk at the idea that technology companies will change the dynamic of the global economy. They remember dotcom bubble of the late ’90s and how things didn’t play out as expected then,” says Moroney.
“I’d be of the view that the ideas back then weren’t wrong. They were just too early. In the ’90s, we were using dial-up lines to use the internet and if you wanted to do something online from home you probably had to shout at someone to get off the phone. The digital transformation of the economy is happening now and the pandemic has just speeded things up.”
The corporate losers will be those that don’t adapt. “Within any sector, whether you’re selling cosmetics or baked beans, companies that are more alert to the move of the economy online will do better,” he says. “It’s not all about investing in tech and cloud computing economies – but in companies that have recognised that the world has changed and are adapting.”
Meanwhile, Bernard Swords, chief investment officer at Goodbody Stockbrokers, says equity markets are due a breather, after a tumultuous 2020.
“Perhaps in the very short term we could see some consolidation in markets and the potential for more sober comments about the logistics of deploying the vaccine, but this should be seen as an opportunity,” Swords said. “This week it looks like we will have the tools to ensure the pandemic will be the story of 2020 and not 2021. People can now return to planning a reasonably normal 2021.”
A spike in savings internationally since March, as households and companies fretted about the future, leaves a potent resource that could supercharge any economic rebound. In the State alone, households placed almost €11 billion on deposit in the first nine months of the year, pushing overall savings up to a record high of €121 billion, according to the Central Bank.
A general release of savings next year would drive equity markets higher, according to Swords.
But risks remain, including the second wave of Covid-19 on both sides of the Atlantic getting out of control, or a series of stop-start cycles of economic lockdowns before a vaccine is properly rolled out. Pfizer expects to have 50 million doses of its vaccine available by the end of this year and 1.2 billion during 2021 – enough to inoculate only about 8 per cent of the global population based on each person receiving it needing two jabs three weeks apart.
Brexit has not gone away
Closer to home, Brexit continues to hang over the economic outlook. The EU wants a deal by the middle of this month to ensure it is ratified by the end of the year, when the UK is set to leave the customs union and single market. Failure to secure a deal would result in trade being subject to tariffs set out by the World Trade Organisation.
There is also a threat that central banks, who rushed to save financial markets and the global economy from outright collapse at the height of the Covid-19 shock earlier this year, will start to scale back unprecedented stimulus too quickly.
Recessions are often triggered by central banks tightening monetary policy – including interest rate hikes – in advance of a feared uptick in inflation.
However, the US Federal Reserve signalled a more relaxed view of inflation, that would allow consumer price growth to "run hot" above its traditional 2 per cent target for a period to make up for years of anaemic levels. Economists say the European Central Bank (ECB) is unlikely to be deterred by the apparent vaccine breakthrough from adding further monetary stimulus next month.
Markets, meanwhile, will be keeping a wary eye on how and when governments unwind extraordinary economic supports to households and businesses during the pandemic.
“I’m absolutely bullish on equities over a five-year-plus horizon, which is what’s relevant for the majority of investors. But I’m not going to make predictions on where markets are going to be in six months,” said Moroney.
“Too much can happen in the short term. Who foresaw at the end of last year that we’d be hit by a pandemic?”
