Markets Rally on Positive Vaccine News
Equity markets had been in a holding pattern but have rallied strongly in November on the back of good vaccine trial data. Both Pfizer and Moderna announced that their vaccines were around 95% effective in preventing COVID-19.
These results were well ahead of expectations and have fuelled equity market rallies.
The expectation is that these two candidates will be submitted to the US FDA for approval any day now and approval will come shortly thereafter. US Operation Warp Speed will then kick in and the vaccines should start being available for use within 24 hours. The expectation is that upwards of twenty million people in the US will be vaccinated before year end and roughly two billion doses (enough for one billion people) should be produced by these two firms in 2021, if both candidates are approved.
It is not all good news though as the number of COVID-19 cases has been rising in Europe and the US. The resultant shutdowns will impact short-term growth but the markets have so far been willing to look through this as there is now light at the end of the tunnel.
The other major development was the US Presidential election which appears to have been won by the Democratic candidate.
However, the Republicans look to have picked up around a dozen House seats. Of concern to markets though is that the Senate is still in play with two run-off elections in the state of Georgia on January 5, 2021.
Also, the RBA lowered its cash rate target to 0.1% from 0.25% and said it would remain there for three years. It also announced $100 billion of Quantitative Easing over the next six months.
Outlook and Markets
Massive fiscal and monetary stimulus as well as statements by Central Banks (US Fed and RBA for example), that interest rates will stay low for several years has helped lift all growth assets including shares.
The prospect of an effective vaccine has provided an extra kick to more cyclical sectors such as financials, energy and travel stocks. In fact, there has been a big rotation to cyclical or value stocks (or re-opening stocks) at the expense of “safe” technology stocks. This should be positive for Australian equities relative to global equities given the proportion of cyclical stocks in our market (banks, resources etc.).
Making forecasts in this environment is very difficult. However, what we are seeing in Australia is upgrades to both company earnings and to GDP growth estimates. According to JP Morgan (AFR, Nov 6) “If you look at it on a one-month basis, every single sector over the past month has seen positive earnings revisions, with the exception of utilities. The number of companies that are upgrading [earnings] is pretty much at all-time highs”.
National Australia Bank has just lifted its forecast for 3rd quarter GDP growth to 4%, up from a flat forecast in September.
A rebound in consumer spending as the economy reopens and an expected lower peak in the unemployment rate were cited.
Earlier in the year it was thought that the housing market would collapse and drag down the economy. ANZ has now replaced its forecast of a 10% fall in home prices in 2020, with a forecast 2% rise, and a 9% gain in 2021.
The biggest risk to markets (apart from equity valuations of over 20x price earnings) are the two run-off elections in the US state of Georgia on January 5. If Biden is declared the winner (on 14 Dec), and the Democrats win both seats, there will be no constraint on what legislation they could enact.
Markets have reacted well after the US election because divided government looked likely. As the leader of the Senate Democrats has said, “If we win Georgia, we will change America”. Both Republicans finished ahead in the recent election, however anything is possible and markets would react very negatively to a Democratic clean sweep.
From our perspective, we would be wary of making any big bets before January 5. This is even though economies and markets look set for further gains as they eye a post COVID-19 world.
The issue is that many policy settings would likely be very different under one party rule and this provides a note of caution for the bulls.
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