Science is moving fast, but the pandemic is still there.
For the third week in a row, a pharmaceutical laboratory announced positive trial news, much to the market’s delight. Yet another new vaccine against COVID-19 has had very promising clinical test results. Unlike the other two vaccines, it uses conventional techniques. That makes it cheaper to produce, which could prove crucial, especially for vaccination campaigns in emerging markets. It is also easier to store.
We pointed out last week that uncertainties persist in relation to these vaccines as they have not yet been written up in scientific publications. However, the news is encouraging. Both the European Medicines Agency and the US Food and Drug Administration have already indicated that they will speed up their procedures, with the final verdict, of course, remaining the prerogative of their scientists.
A number of governments have indicated that vaccinations could take place from the end of this year. From an investor perspective, we can say that an effective vaccine will be available within a reasonable timeframe.
Such hopes would almost make us forget that the contamination curves in Europe have barely started to reverse after the reinforcement of social distancing measures in October. US data has been worrisome (with 266 000 deaths recorded on 25 November) as Thursday’s Thanksgiving holiday, which traditionally involves many trips across the country, approaches. Family celebrations could further the epidemic, at a time when the exponential growth of the current wave has not yet been broken.
European public health authorities and governments have been cautious. They have refused to declare victory even as curves in some countries are flattening. In France, for example, President Macron has announced that the lockdown measures would be lifted gradually under a three-stage plan that still depends on how the epidemic develops. Binding measures remain in place for some sectors. Notably, bars and restaurants cannot open before 20 January. Against this background, new support programmes have been announced.
In the US, President-elect Biden has called for swift action on a bill to fight the coronavirus. Democratic and Republican speakers in Congress now intend to resume discussions on a fiscal package to aid the economy. Support for such measures might be tenuous ahead of run-off elections for two Senate seats on 5 January. For the time being, the Democratic Party has 48 Senate seats and the Republican Party 50.
Markets have focused on political news in the US, with the latest developments supporting risk assets. Although Donald Trump has still not officially acknowledged his defeat, he has resolved to allow the transition from his administration to that of Joe Biden to proceed. Meanwhile, the courts have rejected Trump’s legal challenges over alleged election fraud, one after another.
One person who could possibly join the Biden administration has attracted the attention and enthusiasm of the markets: Janet Yellen. She served as chair of the US Federal Reserve from 2014 to 2018 and is on track to become Treasury Secretary.
We are pleased to report that she would be the first woman to take up this position, but it is equally important for us that Yellen is a first-class economist. Her theoretical anchoring in the New Keynesians and her research on the labour market would be particularly suited to the deep imbalances caused by the health crisis. These will require well-calibrated fiscal measures.
Unsurprisingly, the consequences of another round of more-or-less severe lockdown measures in Europe are already visible in the business surveys: flash PMIs (purchasing manager indices) for November fell sharply.
In the eurozone, the composite PMI posted its third consecutive drop, falling to 45.1, its lowest in six months.
The relative resilience in the manufacturing sector, particularly in Germany, was not enough to offset the sharp drop on the services side, particularly in France, due to the lockdown. The services index for the eurozone as a whole (41.3) dropped back to its lowest since the Global Financial Crisis.
There was some positive news: Germany’s manufacturing index fell only marginally and held above 50. This looks reassuring, particularly for activity in emerging areas. The decline in the IFO business climate index in Germany (from 92.5 to 90.7) was smaller than expected.
In the US, activity in the manufacturing and services sectors grew further. This allowed the composite PMI to reach its highest level since March 2015. However, the decline in US consumer confidence in November reflected concern about the outlook. That could weigh on consumption.
The resurgence of the pandemic in the autumn and the measures taken to stem infections should result in a contraction in GDP in Europe in Q4 and, presumably, in the US in Q1.
On 24 November, the Dow Jones index broke above 30 000 points to close at an all-time high. The broader S&P 500 also rose into record territory. It is up by 11.2% so far this month and by 12.5% this year. This month’s performance has been even stronger in Europe. Global equities are up by 12.6%, looking at the MSCI AC World index (in US dollars).
The good news on the vaccines can be seen to boost the likelihood of a cyclical recovery in 2021. That is one reason for the stock market’s surge. We remain optimistic about the medium-term prospects for risky assets.
In the very short term, the resurgence of the virus poses risks to economic activity that current share price levels, particularly in the US, do not reflect. However, the main central banks are likely to step up their efforts to support growth and jobs in December, even more so as they have already said that progress on vaccine research will not change their stance in the near future.
We believe this crucial supportive element for the real economy and the financial markets is here to stay. It will take on a new dimension in 2021 as ambitious fiscal stimulus plans need to be financed.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.