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The View from the Outer

View from the outer: Vaccine is a light at the end of the tunnel

Tim Rocks
11th November 2020

Vaccine is a light at the end of the tunnel

The positive news from the Pfizer vaccine trial is a light at the end of the tunnel for the global recovery. However uncertainties remain including whether other vaccine candidates will show similar results, whether side effects still emerge, how long protection from the vaccine will last and many questions on the speed of rollout and distribution challenges. Note also that Pfizer expects to only produce enough to inoculate ~650mn people (only ~8% of the world population).

 

So even though approvals are imminent, it will be a few months before a broad roll out starts and could be close to a year before it makes a meaningful difference to disease progression. This means it will do little to alleviate the short term health and economic risks in the US and Europe. It is definitely better news for Australia since a timely vaccine could allow us to avoid another wave of infection and could ensure no further economic damage.

Recommendation

More certainty on the vaccine is clearly positive but it does not change our overall asset allocation stance or our position on equities overall. Earnings forecasts already reflect a strong recover in 2021 and valuations remain extreme in Australia and offshore.

 

However we do agree with the immediate market response in terms of sector rotation and see that this could continue. Investors should consider some of the following:

 

  • The US market is most vulnerable to profit taking in the tech sector given the greater weighting of the sector in the US. Europe and Emerging markets are more attractive now given their different sector mix and better valuations.
  • REITs (particularly SCG and VCX), Sydney Airport and casinos (SGR and SKC) are our preferred recovery plays in the Australian market. REITs are still trading at big discounts to underlying asset values and rents are steadily normalizing.
  • The energy sector will be another major beneficiary of normalization although it could take some time to work through excess inventories.
  • Investors should consider investing some of their funds with a global value manager if they do not feel confident in investing in some of the sectors where value is most attractive such as airlines and auto companies.

In terms of other sectors where there are some lingering issues:

 

  • Banks are cheap and will ultimately be beneficiaries of normalisation but significant issues will linger through 2021 at least. Margins will remain under pressure as long as interest rates are so low and the full extent of bad debt problems are not yet known.
  • We are wary on consumer goods companies such as JB Hifi. Consumers could switch from spending on goods to spending on services and experiences.

In terms of other sectors we retain our strong preference for global healthcare companies. We are also comfortable holding gold in portfolios even if there is some volatility in the price in the short term. Gold is a good hedge against a range of potential threats that could haunt markets over the next few years.