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Ahead of the curve: The prospect of a Covid vaccination moves markets

November 11, 2020

A commentary by Jürgen Lukasser, Chief Investment Officer LGT Bank Österreich, who observed the first vaccine rally on the stock marketsyesterday after the pharmaceutical company Pfizer and its partner BioNTech published positive data for their Covid 19 vaccine.

Ahead of the curve: The prospect of a Covid vaccination moves markets

This news is certainly a reason for hope and can be seen as another important milestone in the fight against the pandemic. However, we have not yet reached our goal, as many details and questions remain unanswered. Nevertheless, this interim success should further improve the mood on the stock markets. 

Rotation on the stock market

The divergences that have accompanied us throughout 2020 will remain an integral part of the market environment after the U.S. elections and the first successes in vaccine development. Election uncertainty has been reduced and the hope for a vaccine provides light at the end of the tunnel. Markets are therefore beginning to change positioning. At sector level, a rotation in pharmaceutical stocks that were strongly avoided by investors prior to the presidential elections due to the expected blue wave is taking place now. The sector has an attractive risk-return ratio, valuations are below the long-term average and in most cases there is also an attractive dividend yield.

Movement in long-term US yields

The announcement of the vaccine with surprisingly high efficacy was seen by many market participants as setting the course for the global economy. At the same time, rising yields on long-term U.S. government bonds could act as a "game changer" - with an immediate impact on the international equity and credit markets. The yield on 10-year US Treasuries jumped to 0.97%. This is still a very low figure in itself, but at the same time the highest level seen since March 2020. However, rising long-term yields could have an immediate impact on those stocks that have shown incredible momentum in recent months and are currently attracting attention with high valuations. In many valuation models, long-term US yields play a major role, as they represent the risk-free alternative investment. In this context, some of the best performing stocks of 2020 now have the highest valuations of the current year. This means that there is no longer any valuation reserve for disappointments in the company figures. Negative news thus makes a clear sell-off in these stocks a realistic option.

Together with the prospects of an effective Covid vaccination, the valuation problems have led to a correction for many technology stocks. In return, cyclical stocks - these are not companies whose success is heavily dependent on a positive economic situation - were able to benefit significantly yesterday.

A look at the emerging markets

On a country level, emerging market equities appear to be interesting again. Under Biden's presidency, we expect emerging markets to benefit from greater political visibility, an economic recovery, persistently low interest rates and a potentially weaker US dollar.

Conclusions

November and December are historically good months for the stock markets, in contrast to September and October. In addition, there is still a great deal of liquidity on the sidelines and, in a persistently low interest rate environment, there could well be an increased flow of money into the stock market again by the end of the year. With this outlook, and if the fog of the US election has cleared and there is more clarity, positions in high-quality equities can tend to be built up.

 

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