What has been the impact of news of a potential vaccine on global markets?

The question on everyone’s lips for months has been – ‘when will a COVID-19 vaccine be ready?’ – and with the series of announcements across the world that there are several promising options soon to be available, Business Leader spoke to two leading market analysts to find out the impact of the news.

When the first revelation came last week that are a few vaccines in testing, share prices and global markets went haywire. For example, British Airways, which had been struggling, shot up in value – while Zoom, which has experienced a rapid rise over the last few months, took a heavy hit.

With the initial reaction in the past, and an almost hourly update on the progress of the various vaccines – what was the true impact of the announcement? And what could happen next?

Susannah Streeter, Senior Investment and Markets Analyst, Hargreaves Lansdown

The financial markets have had a double dose of positive vaccine news, sending indices higher as investors see the light at the end of the coronavirus tunnel shining brighter.

Aviation and hospitality stocks had already been on the front foot, basking in the relief of the Pfizer breakthrough but the news from Moderna indicating its vaccine is almost 95% effective, and may pose fewer logistical issues, sent share prices rising again.

This is early data and the Moderna vaccine isn’t likely to be approved for at least another few weeks. Once the green lights are given there could also be significant logistical issues with vaccine roll outs given the huge scale of demand. So the recovery in the airline and hospitality sectors is likely to be hit by interruptions and delays. Social distancing rules won’t ease quickly, even when regions come out of lockdowns, so although pent up demand is there for travel and eating out, the public may still be limited in booking seats on planes and in restaurants. There are also concerns about just how quickly the UK economy will recover. Unemployment is expected to rise to around 8% early next year and with finances squeezed consumers may have less to spend on nights out and weekends away. Global travel isn’t expected to return to pre-pandemic levels until 2023, so the flight back to profit for many airlines won’t be without turbulence.

There is speculation that the zoom honeymoon could be over, particularly with the share price falling back along with other ‘stay at home stocks,’ following the Pfizer announcement. However although there is likely to be some correction in the share price, long term the prospects still look good for Zoom. Its name not only became a household verb but it rattled and rivalled giants like Microsoft in the corporate world. Although Zoom appears to have peaked in popularity during the pandemic, it comes at a time when there is also concern over environmental impact of business travel. Although some high level meetings may resume face to face, virtual get together of global teams are unlikely to fade into memory, but instead become regular calendar events to keep CO2 emissions down, whilst keeping colleagues connected.

Eric Silvestre, CFA Senior Investment Research Analyst, Alpha Portfolio Management

Vaccine announcements have been a significant relief for global markets, but especially for a number of economically sensitive sectors. Although, to many, the move in markets feels rather at odds with the continuing rise in COVID-19 cases worldwide.

Why is this? This is due to markets tending to look beyond the current noise and having the ability to look at longer-term trends – months or even years into the future.

Source: Alpha Portfolio Management/FE Analytics

As the table above reflects, the emergence of a pandemic appears to have triggered an acceleration of sector trends. This has created an extreme divergence in performance between markets and sectors, both domestically and also globally. Seeing the light turn on at the end of the tunnel has driven up underperforming areas and has been dubbed the ‘great rotation’. In simple terms, at a headline level, investors are moving from Technology to Banks and Oil, from Growth to Value and from COVID-19 winners to laggards.

In some cases, this rotation has a straightforward repercussion, such as “sell Zoom”. The shares started the year at $115, hitting a high of nearly $600 in October and have now settled to around $400 a share. However, there are other more nuanced factors to consider, namely the improved prospects for an economic recovery and the potential ramp up in consumption fuelled by aggressive fiscal spending and an increase in the savings ratio through the lockdown period, which could lead to pent-up demand.

While the news on vaccines feels like a game changer, the path to a full return to normality remains unclear. Investing in some of the hardest hit stocks, such as aviation and hospitality, may seem tempting, and in some cases appropriate for investors with the right attitude to risk. However, as Keynes once said, ‘markets can remain irrational longer than you can remain solvent’. Or in this case, COVID-19 restrictions could remain for longer than companies’ cash reserves or support of the bankers.

Therefore, whether or not this is the right time to invest in the so-called ‘reopening sectors’ will depend on the specific stocks in question, their balance sheet strength, available liquidity, competitive advantage and value proposition in a post-pandemic world. We know that government restrictions have limited consumer choices in the past year, however, the extent to which some of these choices may have permanently changed is an important topic for debate.

Zoom has arrived and isn’t about to fade away. How much remote working, online spending and video conferencing will shape the future, only time will tell.