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Is the market already vaccinated?

MONTHLY INVESTMENT BRIEF

NOVEMBER 2020

 

Laurent Denize

Laurent Denize,
GLOBAL CO-CIO &
GLOBAL HEAD OF FIXED INCOME

Our conviction is that this is not (yet) the time to move to a pure rotation from "Growth" to "Value"

Pfizer's announcement of preliminary positive results from its coronavirus vaccine trial has had a substantial impact on financial markets. Pfizer, the company that developed the vaccine in collaboration with the German biotechnology company BioNTech SE, released preliminary data suggesting that the vaccine was more than 90 percent effective. The U.S. pharmaceutical giant also said it plans to seek emergency approval for its two-dose vaccine from the FDA before the end of November, after more safety data has been collected. Pfizer says it expects to produce enough doses to immunize 15 to 20 million people by the end of the year.

In response to this news, U.S. equities nearly reached an alltime high, the price of WTI crude oil rose 7% and the 10-year U.S. Treasury yield reached 0.9%. In addition, hopes of a reopening of the economies allowed the stocks that were penalized this year to significantly outperform.

The divergent impact of the pandemic on the equity market is clearly reflected in the relative performance discrepancy between Growth and Value stocks. The former are generally more sensitive to the economy, while the latter, which are strongly focused on technology stocks, have benefited from the boom in online shopping, home-based work and, above all, the fall in interest rates.

Does Pfizer's announcement "finally" mark a decisive turning point in the relative performance of Value stocks? "Yes" is a tempting answer, but for now there is still too much uncertainty about the vaccine and its efficacy to answer too assertively. First, the vaccine has to be stored under extreme conditions, which could lead to a number of major logistical obstacles. Second, a "miracle" vaccine must be both effective and safe, and Pfizer's statements focused on the first point. Investors should have more information on the safety of the vaccine later this month.

The bottom line for investors is that yesterday's announcement is a significant step toward ending the pandemic. It is the signal we have been waiting for to reposition ourselves on cyclical stocks. As a result of this promising news, we are therefore starting to rotate our portfolios towards quality cyclical stocks in order to diversify our pure growth positioning. We are also taking profits on the most expensive names on the stock market (certain “stay-at-home”-technology stocks because very high multiples seem less justified to us in a normalization process).

Nevertheless, our conviction is that this is not (yet) the time to move to a pure rotation from "Growth" to "Value". Some Value sectors are indeed discounted for good reasons and disruption or regulation will not disappear overnight. Moreover, even if we could see a violent return to the average, it is likely to be short-lived as long as potential economic growth does not accelerate dramatically. A second signal would be a ratification of stimulus programs in both the United States and Europe combined with a monetary policy that continues to be very accommodating. We are not far from that point, but patience is needed, one must wait for the confirmation of a signal in an investment policy. As you all know, timing remains key.

We therefore add risk on 3 axes:

1. We diversify portfolios by slightly accelerating sector rotation with high quality cyclical stocks.

2. In credit, we are increasing our positioning in European High Yield, which offers an attractive risk/return profile and remains largely uncorrelated to interest rates.

3. We are increasing our positioning in Emerging Markets.

For investors who can withstand very high volatility, repositioning on banks in the short term makes sense. The valuation on the bottom line, the reassuring sequence of recent results, and the prospect of a more flexible regulation in the payment of dividends are all arguments in favor of the banking sector. This tactical move must remain disciplined by rapid profit-taking and a maximum allowable level of losses, which, if reached, must result in a sale at a loss.

Caution nevertheless, our conviction is that the long-term performance in your portfolios will essentially come from strategic rather than tactical positioning.

 

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