Macro views

Virus surge leads to lockdown misery. So why might equities rally?

Macro Update 2 November 2020
November 2020


This week is all about the US election, with President Trump and Joe Biden further apart in terms of policy – economic, social and environmental – than any previous contenders I can recall.


The result of this election really does matter, for equities and just about everything else. But basing an investment strategy on guessing the result – or indeed speculating on the policies that might follow – is tricky.

With that in mind, I’d like to look away from the election and consider something that matters even more: the virus. In one sense the news is bleak. Soaring numbers of new cases in Europe have led to extensive national lockdowns. Just as the world economy was pulling out of the worst recession on record, the renewed shutdowns risk a double dip and seemingly endless misery.


Vaccines to the rescue?

But there is a positive scenario and we should get news on the vaccine soon.  Pfizer and AstraZeneca are set to report on their Phase III trials, and given both produce a strong immune response, we are cautiously optimistic that the results will show that they offer protection against the virus.

The question is: how much protection? If the efficacy rate is 50% for example, that might sound disappointing – after all, that would mean a coin toss over whether it works on any one individual. The vulnerable would still have to be careful. But looked at another way, a 50% efficacy rate would be a game changer. If the R0 number were 1.5 before the vaccine, it becomes 0.75 and the virus rapidly diminishes. Of course, that would only happen if everyone were vaccinated and that takes time. But the efforts of governments, drug companies and medical researchers mean that timescales have been dramatically compressed compared with previous timelines. If the AstraZeneca vaccine works, the UK government has plans to begin a mass vaccination programme before Christmas. The plan is for 10 million doses a month, starting with key workers and the elderly, before moving swiftly on to the rest of the population.

Of course, 50% efficacy does not eliminate the virus, but it will move the curve of new infections into a steep descent. We believe that several of the 11 vaccines currently in Phase III trials will prove effective. Some, such as the Johnson & Johnson, vaccine will require only a single dose. Others can be stored in a standard refrigerator, making distribution easier. Some will be more effective in protecting the elderly, others may be more suitable for diabetics. The virus has fought back strongly but we believe the odds of a successful outcome are in our favour.


Recent weakness may present opportunity

Two weeks ago, we said we were looking for a 5% setback in markets and would view such a move as a buying opportunity. It didn’t occur exactly as we’d expected but markets are generally down by that amount or a little more, as we speak.

Whatever the outcome of the election, a successful vaccine will improve the prospects for world growth and corporate profitability. It may not come in time to save Christmas, but it could well save the financial recovery. Despite the double dip lockdowns and all the other uncertainties, I hold to my view that the recent market correction is a buying opportunity.

Until next week, enjoy what limited freedom you have and keep your fingers crossed that the scientists will bail us out of this mess.

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions


Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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