The world looks rather different than it did at the start of the week, after news emerged of a potentially game-changing coronavirus vaccine and a winner in the US presidential election.
Pfizer and BioNTech told the world’s press on Monday that their coronavirus vaccine was 90% effective in initial results. That is nearly twice as effective as vaccines against influenza, which are estimated to work in 40% to 60% of cases. If the early findings hold good, this is excellent news, and it duly triggered bullishness in equity markets, with indices gaining around the world.
There were shifts in the pattern of individual share prices, as investors priced in a move toward ‘old normal’ spending patterns. Cruise liners and commercial property landlords bounced higher, while staples of the ‘working from home’ lifestyle, such as Peloton and Zoom, performed poorly. The changes were not enough to override recent trends, however, erasing only a small part of the gains that 2020 ‘winner’ companies have racked up, and restoring only a proportion of the losses of 2020 ‘loser’ companies. Questions abound what kind of ‘normality’ we will return to. Equity market developments suggest that once a vaccine is rolled out, life will not instantly return to the ‘old normal’ that existed pre-COVID.
This week’s vaccine news is encouraging and bodes well for other vaccines in late-stage trials. If they too prove to be successful, the world could have more than five billion doses available by the end of next year. Relative efficacy is not the only thing likely to affect global rollout. The BioNTech/Pfizer vaccine is an mRNA vaccine, which must be kept at much lower temperatures than standard vaccines: -70 Celsius in its current form, which will require special distribution structures. The company only expects to produce 50 million doses by the end of December, enough to inoculate just 25 million people. By comparison, the Chinese firm Sinovac aims to produce 610 million doses by the end of the year, and more than one biIllion in 2021. Both vaccines require two doses. If all goes to plan, Sinovac may be able to inoculate 12 times as many people with the vaccines they produce this year – and its vaccine can safely be distributed at a normal fridge temperature of below 8 Celsius. However, with current orders from several developed countries already close to one billion, perhaps the most highly anticipated vaccine candidate is being produced by the University of Oxford and AstraZeneca. It too needs two doses and can be kept at a similar temperature to the Sinovac vaccine. However, estimates suggest that there is the capacity to make three billion doses at around $3 each – a tenth of the price currently offered by its Chinese competitor.
All things considered, the news about the BioNTech/Pfizer vaccine is unambiguously positive for the economic outlook. Admittedly, a vaccine will not arrive in time to prevent GDP from contracting in many European countries this quarter. However, it reinforces Fathom’s belief that economic activity will rebound strongly in 2021. One important tailwind through next year will be the savings that households in developed markets have built up since March. In the US, for example, aggregate personal savings over the past twelve months were $1.3 trillion higher in September than they were in February. If effective vaccines are rolled out, much of those savings will probably be unwound, with spending likely to be strong in badly hit services sectors such as hospitality and tourism. Improved confidence about future demand should boost business confidence now, and business investment should react ahead of widespread vaccinations. So, while the near-term economic outlook in Europe and the US is weak or sluggish, Fathom has a greater conviction in a pronounced rebound in confidence and spending through 2021. Fathom is updating its economic scenarios and will share these with clients as part of its quarterly Global Economic and Markets Outlook presentations.
In non-vaccine news, Joe Biden was declared US President-elect over the weekend. We outlined the likely implications for the US economy in a recent research note. If the Democrats do not control the Senate, as appears likely, Biden will still have something close to free rein in setting foreign policy. We await clarity on how a Biden administration will approach relations with China. Fathom’s China Exposure Index (CEI), which tracks the relative equity prices of US-listed companies with a large exposure to China, suggests investors expect an easing in tensions. The index, which has a good record in tracking Sino-US tensions, has increased sharply since September, in line with Biden’s perceived likelihood of winning the election. In reality, it is not clear to us that a Biden administration will implement a materially different China policy. Indeed, it is Fathom’s long-held view that Sino-US tensions go beyond the politics of the current administration, and instead reflect what is likely to be a multi-year battle over global influence. If that proves to be the case, the CEI may have some room to fall.
During the Trump presidency, Chinese M&A investment into the US has fallen significantly. In 2019 the number of deals had more than halved compared to the peak in 2016, and the value of these deals had fallen even more. Chinese M&A into Europe has also fallen substantially in recent years. President-elect Joe Biden has already made clear his intention of re-joining the WHO and the Paris Climate Agreement, suggesting his administration will adopt a more multilateral approach to foreign policy than his predecessor, and that future action on China will be better synchronised by the US and its partners. If that is the case, then the common trend seen in outbound Chinese M&A may also be reflected in trade, where US-China flows have dropped much more than EU-China flows.
Michel Barnier, the EU’s chief negotiator, is in London for talks on a trade deal as the clock ticks towards the end of the UK’s transition period. The mood music appears to have improved, with speculation that Mr Biden’s electoral victory will increase the pressure on London to come to an arrangement. It appears more probable than not that the two sides will strike a deal. However, investors appear even more bullish than that. Fathom’s Sterling Relative Risk Metric, which calculates the relative risk across sterling assets compared to other developed markets, is relatively muted. Should talks break down, expect a spike higher.
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