As the news of vaccine developments unfolded, we made changes to our clients’ managed investment portfolios to position them for market movements over the coming months, as Rebecca Cretney explains.
After months of doom and gloom due to the coronavirus pandemic, there finally seems to be light at the end of the tunnel in the form of not just one vaccine, but three, with a further 11 more currently in the middle of phase-three trials, including the vaccine being developed by Johnson and Johnson (J&J). And while this means that the chances of economic recovery are much more likely, and the stock market responded accordingly, you’d be forgiven for missing the bump in values. Since April, we have seen some stock markets steadily climb to new heights, with the NASDAQ already having reached new highs even before the announcement of any vaccine.
However, the news marks an important line in the sand and, as such, a point in time for us to re-evaluate our positioning in what has been a highly unusual set of months. But before we go into the details, it’s worth recapping on the vaccine information.
The positive news started on 9 November, with Pfizer/BioNTech announcing a 90% effective vaccine. This was followed by an update on the final analysis of Phase 3 trials, which saw the vaccine’s efficacy for two doses, four weeks apart, raising to 95% (94% for the elderly). On the back of these results, Pfizer has applied for emergency use authorisation from the US Food and Drug Administration (FDA) – a process that typically takes a few weeks and starts with an advisory committee meeting to review the vaccine scheduled for early December. Other nations are looking to approve use simultaneously.
Swiftly on the heels of the German-US partnership, on 16 November, Moderna announced its independently verified results of Phase 3 trials, which again saw patients receiving two doses over four weeks, yielding a 95% efficacy. The company has applied for approval and expects to receive FDA emergency use and other national authorisations to use the vaccine in the coming weeks.
Then on 23 November, the AstraZeneca/Oxford University results were published, showing an efficacy of around 70% for one dose, 62% if the average person receives two full doses, and 90% if a half dose is followed by a full dose a month later. This surprising result – the consequence of the wrong doses being given during some of its trials – is deemed to be more successful as the first lower dose seems to prime the immune system for the second dose. This is likely to be approved in early January 2021, although the 90% results will need to be proven in further testing as the results were only from trials for people under the age of 55.
We should not forget that the Russian Sputnik V vaccine, named after the world’s first satellite sent into space, is already being distributed. However, given the limited scrutiny by international and independent experts, the 92% efficacy isn’t generating the same levels of celebration. Interestingly, Vladimir Putin has yet to be vaccinated.
Pfizer/BioNTech reports state that it is planning emergency distribution of 50 million doses of the vaccine by the end of the year, covering 25 million people, to reach people in the US, the UK, Japan and other parts of the European Union simultaneously. Its projections anticipate a further 1.3 billion doses will be distributed next year. Moderna has announced that it will distribute up to 50 million doses globally by the end of the year, and between 500 million to 1 billion in 2021. AstraZeneca/Oxford University hope to produce up to 3 billion doses by the end of 2021.
This all means the UK and US will have immunised its vulnerable populations by the spring, and then the US, UK, Canada and Japan are likely to reach herd immunity by early summer. The EU and Australia may also get there over the summer, but will be much more dependent on the AstraZeneca/Oxford University achieving its 90% efficacy rate, or another vaccine being authorised.
The complication lies with the distribution. While the AstraZeneca/Oxford University vaccine is simply stored in the fridge for up to six months, the Moderna vaccine needs to be kept at temperatures below -20ºC, before it can be kept in a fridge for a month. However, the Pfizer/BioNTech vaccine needs to be kept at under -70ºC, and while it can be repacked with dry ice for up to 15 days, it can then only last in a fridge for five days.
Cost is also a factor, with Moderna anticipated to be the most expensive at up to US$100 to vaccinate someone, although the US has negotiated a price of US$30 and the EU is aiming to keep the price below US$50 per person. Pfizer/BioNTech are expected to charge governments around US$40 per recipient, although their pricing also relies on the use of freezers costing around US$70,000 each to maintain the temperature. As such, AstraZeneca/ Oxford University is winning the price war at around US$6 a person – a level that’s even cheaper than the Sputnik V vaccine, which is estimated to cost around US$20 for each beneficiary.
Because of all this, for the rest of the world, their hopes hang on AstraZeneca/Oxford University. Not only is it substantially cheaper, but emerging market countries have been promised it at cost, because the producers signed up to the World Health Organization’s COVAX agreements (a coalition who have permanently committed to fair and equal distribution across the world). Meanwhile, if the half dose/full dose technique proves to be more effective, it also reduces the vaccine volumes used so more individuals can be vaccinated.
The news of the first vaccine signalled a shift in economic prospects to markets. And almost immediately, there was a switch from growth stocks to their cyclical and value counterparts.
In expectation of this, the discussion in our investment committee led to a decision to increase the cyclicality of the portfolio, for two reasons:
On the other side of the valuation scale, we find communication services and information technology stocks, and many of our clients have been asking whether the bubble will burst. While we covered the difference before between tech stocks now versus those caught up in the dot.com bubble, it is worth stopping for a minute to argue FAANG* stocks may only fizzle or even continue to rise until:
But given that the best returns are now likely to be found in the more attractively priced value stocks, we reduced our exposure to both Fundsmith and Morgan Stanley, and used the proceeds to add 2% (using the balanced strategy as an example, although that extended to 5% for our equity fund) to our exposure to Dodge & Cox, which provides additional exposure to cyclical stocks.
And we could also redeploy capital that’s been parked in safe havens, in case of a further fall in markets similar to that in March/April, in our fixed income positions. As such, we reduced our exposure to US government bonds by -4% and added +2% to each of our high yield bond managers (AXA and Muzinich), again using the balanced strategy as an example, but which is a more substantial 8% move for our income strategy.
To put this move in context for clients, the return of our US government bond portfolio was only yielding 0.6-0.7%, versus short duration, high yield bonds returning around 4%.
Additionally, we have taken the opportunity to add a new company to our portfolios in Round Hill Music Royalty Fund. This investment gives clients exposure to long-term cashflow streams generated by song royalties of a more mature song catalogue, which complements our Hipgnosis holding. Although this is not an opportunity which was instigated by the change of economic sentiment, it is still worth flagging for those of you who keep close tabs on your portfolios.
But why make changes to our equities and bonds so soon? Even if production of the vaccine can be as rapid as Pfizer/BioNTech claim, we will still have to slog through the coming winter. Any steep increase in the numbers of cases could spiral out of control, and especially given there could be less appetite for lockdowns. We are not out of the woods yet in terms of bad news.
Furthermore, Congress passing a big fiscal stimulus in the US is now even less likely, which will dampen consumer spending until economic activity starts to return to some semblance of normality. Europe too has yet to agree its second stimulus package, which limits the growth prospects there as well.
Any portfolio changes, however, have to take place ahead of the decision by markets that the world economy will grow again, not least as markets can price in an event up to two years ahead of the actual occurrence.
To conclude therefore, the timing of our portfolio changes is due primarily to our view that corporate earnings will recover sharply when the vaccines are rolled out, and that the most marked recovery will be in those markets and sectors that have suffered disproportionately during 2020.
Many of us will, no doubt, be glad to say goodbye to 2020 just as much as we welcome in 2021, and that includes the management teams of companies that are classed as cyclical and value stocks.
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* FAANGs = Facebook, Amazon, Apple, Netflix and Google (aka Alphabet Inc.).
Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rate changes also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.
Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.
She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.
Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.
Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.
She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.
Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.
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