Coronavirus vaccines: betting on a return to normality
For many capital market players, 9 November 2020 will be a date to remember. This was the day when Mainz-based biotech company BioNTech announced that it had achieved around 90 per cent effectiveness in a phase-three clinical trial. The news fuelled euphoria in the global stock markets, and the DAX 30 index was up by almost 6 per cent for a time. There was also a marked sector rotation from growth shares into value shares and more cyclical stocks.
Not long after, encouraging results also emerged from the trials conducted by US biotech company Moderna (very good effectiveness) and pharmaceutical manufacturer AstraZeneca (good effectiveness). What does this success on the vaccine front mean for the capital markets going forward? There is a strong chance that various coronavirus vaccines will soon be approved around the world. In the United Kingdom and the USA, BioNTech/Pfizer's vaccine has become the first western vaccine to be approved for use. Moderna and BioNTech (with its US partner Pfizer) have applied for emergency approval in the European Union (EU) and elsewhere; a decision is expected in the next few weeks.
Vaccine development raises hopes
Change of mood in the capital markets
According to experts at Union Investment, the news about the vaccines has changed the mood in the capital markets. “Thanks to these scientific breakthroughs, we are now very confident that investing early in the cycle is necessary, as would be typical under normal circumstances. Following a short, sharp recession, we find ourselves at the start of a new economic cycle,” says Benjardin Gärtner, Head of Equity Portfolio Management at Union Investment.
For a gradual return to economic and social normality, the vaccines need to be widely available from mid-2021 and they need to live up to expectations. This would provide the basis on which to jump-start the global economy and generate impressive growth rates. Until then, the ongoing social-distancing measures are likely to hold back economic activity. The experts at Union Investment anticipate that the economy will pick up markedly from the second quarter of 2021 onwards.
But what are the concerns about rolling out the vaccines? Firstly, distributing them poses a logistical challenge. At the moment, the vaccines from Moderna and BioNTech have to be kept very cold, especially during storage and transport. This makes distribution more costly and more complex. The advantage of the AstraZeneca vaccine is that it can be transported and stored at normal fridge temperature.
Production quantities are another issue. According to the companies’ planning, it should be possible to make the vaccines widely available in 2021. Pfizer/BioNTech has the capacity to produce 50 million doses in 2020 and 1.3 billion in 2021. Moderna has announced that it intends to manufacture a total of around 500 million to one billion doses in 2021. AstraZeneca plans to produce up to 1.3 billion doses of its vaccine, which it developed in partnership with the University of Oxford. Moreover, the EU has signed a supply agreement with Moderna for up to 160 million doses and with AstraZeneca/University of Oxford for 300 million doses. BioNTech/Pfizer may be able to supply up to 300 million doses to the EU from the end of 2020. All of the vaccines together should be sufficient to vaccinate the European population.
Falling number of new cases in Europe
One of the uncertainties is the speed with which the vaccines can be distributed. It is also not yet clear for how long the vaccines offer protection against the virus and whether they are equally effective among all age groups. Although no serious side effects were observed during the clinical trials, the long-term side-effects are still unknown.
Coronavirus vaccine development
The development of coronavirus vaccines is based on various approaches:
Inactivated vaccines: In the case of an inactivated vaccine, a coronavirus replicated in the laboratory is weakened or inactivated. This inactivated virus can no longer cause any disease in people but can induce an immune response for the production of antibodies. Inactivated vaccines are already used to vaccinate against many viruses (e.g. flu, polio and hepatitis B). They are developed by companies such as Sinopharm and Sinovac from China. Sanofi, GlaxoSmithKline and Novavax are working on a recombinant vaccine with antigens produced using gene technology. A flu vaccine developed on this basis by Sanofi has already been approved.
Vector vaccines: In the case of a vector vaccine, an existing virus (e.g. adenovirus) is supplemented with specific elements of coronavirus, which uses it to attack human cells. AstraZeneca, Merck and Johnson & Johnson are developing vaccines based on this fundamental principle, which has been used to vaccinate against diseases such as ebola.
mRNA-based vaccines: These vaccines are based on the principle of training the patient’s own cells to produce virus proteins by providing them with the necessary instructions. The patient then develops antibodies against the antigens that the body has produced, and these antibodies immunise the patient against coronavirus. The technique is still new, which means that the safety and possible long-terms risks of this method are not yet fully known. Companies working on mRNA-based vaccines include Moderna, CureVac and BioNTech/Pfizer.
Favourable conditions for opportunity-oriented investments
Nevertheless, there is a chance that the economy will reopen in 2021, and the equity markets have already partly priced this in. And unlike in earlier cycles, central banks and governments are likely to continue with their coronavirus crisis stimulus measures as the economy starts to recover. Economic momentum, monetary policy stimulus and support from fiscal policy together create a scenario that is almost as positive as it can be for opportunity-oriented investments.
Our economists predict that gross domestic product (GDP) will grow by 4.2 per cent in the eurozone and by 3.3 per cent in both Germany and the US in 2021 as a whole. China should see a rise of 8.5 per cent, so it will be a major driving force for the recovery.
Avoid defensive stocks
In this environment, Union Investment believes that equities are the most attractive asset class. In 2021, profits are expected to take over as the main source of momentum. Profit growth of up to 30 per cent appears possible for the MSCI World index. Going forward, corporate profits and valuations of cyclical stocks are set to rise on the whole. The recommendation for equity investments is therefore a broader mix incorporating cyclical elements as well as shares in IT companies. This would allow participation in the shifting profit dynamics among the sectors but without taking on too much risk should there be setbacks in the attempts to tackle the pandemic.
While European bank stocks can be overweighted, the weighting of more economically defensive sectors (e.g. telecommunications providers) should be reduced slightly, as should that of companies that benefited from the coronavirus crisis whose shares now have a very high valuation. However, the higher valuations of the structural winners of digitalisation and other long-term trends are likely to persist due to the scarcity of growth companies.
Following years of dominance by the ‘growth’ and ‘quality’ investment styles, Union Investment expects the different styles to fall more into line with each other. Value regions, including the eurozone and Japan, should do well in the anticipated environment. Structural factors and the transformation within many economic areas suggest that growth regions such as the US and emerging markets in Asia will remain particularly in demand, regardless of their already historically high valuations.
Steepening of the US yield curve
In the bond asset class, the widespread availability of coronavirus vaccines will probably diminish the appeal of safe havens. The yield curve should steepen a little more for safe-haven government bonds and the transatlantic spread (yield differential between US Treasuries and German government bonds) should widen in 2021. Other opportunities in this segment remain modest.
Selection is crucial when it comes to emerging market bonds that still offer a risk premium. The risk of a significant rating downgrade has risen sharply in many countries as a result of the pandemic. Careful security selection is also the order of the day in the corporate bond sector, where risk premiums can still be found.
As at 8 December 2020