What a difference a vaccine makes. When Pfizer and collaborator BioNTech announced on November 9 that their Covid-19 vaccine was 90 per cent effective, global stock markets jumped to record highs.
With more vaccines in the pipeline, from US biotechnology firm Moderna and the AstraZeneca’s partnership with Oxford University in the UK, investors embarked on a scramble for bargains.
Sectors hit hardest by the global lockdown got a much-needed shot in the arm, including airlines, cinema chains, hotels, banks and oil majors.
Boeing’s stock price jumped 17 per cent on the day Pfizer's vaccine was announced, while in Europe, Airbus climbed nearly 19 per cent and UK budget carrier easyJet jumped more than a third. Other rapid risers included jet engine maker Rolls-Royce, whose shares almost doubled, cinema chain Cineworld and cruise company Carnival.
The vaccine was bad news for shares that did well from the lockdown, including US tech firms Amazon, Netflix and Zoom, and other “stay-at-home” stars such as Peloton, Teladoc Health and Shopify.
Perhaps surprisingly, healthcare stocks have been pretty flat. While Pfizer’s share price jumped 9 per cent to $37.14 on hopes the vaccine could generate $13 billion worth of sales next year, it has since slipped back to around $36.70 a share as of Friday.
This is despite US billionaire Warren Buffett placing bets on “big pharma”. His Berkshire Hathaway investment vehicle disclosed new investments in Pfizer and Merck during the third quarter and further purchases of Abbvie and Bristol-Myers Squibb.
Vijay Valecha, chief investment officer at Century Financial in Dubai, cautions against racing into pharmaceutical stocks. “I would avoid defensive sectors such as healthcare, food and utilities right now. They have done well in the pandemic, but are expensive and could trail as the economy recovers.”
So, where should you invest today?
If vaccines proceed as planned, airlines, hotels, leisure, retail and property stocks should continue to recover, while technology may trail, says Michael Taylor, global head of front office at Abu Dhabi-based brokerage ADSS.
However, he says that mass Covid-19 protection remains some way off, as we await further trials and public vaccination programmes. “Any setbacks would hit the stocks that have rallied most in recent sessions. It is still important to retain a diversified portfolio, with a long-term time horizon.”
There could be a downside to vaccine euphoria, warns Chris Beauchamp, chief market analyst at IG. “This will make it harder to get a US stimulus deal done, especially with the presidential election result frozen as Donald Trump refuses to admit defeat.”
Investors should also exercise caution after the recent share buying frenzy following Pfizer and Moderna's vaccine news, says Joe McDonnell, head of portfolio solutions at Neuberger Berman. “Companies whose share prices rallied most still face considerable headwinds. They may now survive but that does not mean they will thrive.”
Next year will see a push to control the surge of infections in Europe and the US. “Then we have to overcome the logistical challenges of distributing the vaccines and persuading people to accept them.”
We still face a long, dark winter. “Otherwise we’d probably be going all-in for value and cyclical stocks,” Mr McDonnell says.
Investors should build their exposure to smaller- and medium-sized US companies, and in Europe and Japan to benefit when the recovery kicks in, he adds.
Mark Haefele, chief investment officer at UBS Global Wealth Management, is more optimistic for 2021, saying it will be a year of renewal, driven by vaccine rollouts, fiscal stimulus, low interest rates and fresh political leadership. “This should generate above-average returns for small- and mid-sized companies, select financial and energy stocks, and companies in the industrial and consumer discretionary sectors.”
He urges investors to look beyond US tech giants that have dominated this year. “Think global, look for catch-up potential, and seek new long-term winners.”
This means diversifying out of low-yielding cash and bonds, and hunting for yield in emerging market US dollar-denominated sovereign bonds and Asian high-yield bonds instead. “Position for a weaker dollar by diversifying across G10 currencies or into select emerging market currencies and gold,” Mr Haefele adds.
He says investors face a world that is more indebted, more unequal and more local, “but also more digital and, in some respects, more sustainable”.
Major trends include the transition to a zero-carbon economy, digitisation of financial services, and the drive to create a more efficient and holistic healthcare system, Mr Haefele says. “Companies exposed to these trends should enjoy above average growth over the longer term.”
Arnab Das, global market strategist at fund manager Invesco, also expects the economy to “normalise” next year and recommends investing in a broad spread of asset classes and regions, including gold and government bonds. “Cyclical and value stocks are likely to benefit as investors are willing to take on more risk.”
Many investors prefer to spread risk by investing in low-cost exchange traded funds (ETFs), rather than direct equities.
Mr Valecha says ETFs are a great way to play the recovery, but before you buy any fund, make sure it balances your existing holdings.
Smaller companies typically fall faster than big blue chips in a downturn, but rise faster in a recovery.
Mr Valecha says they are rising now as third-quarter profits on the Russell 2000 Index of smaller US companies came in 89 per cent higher than analyst estimates, against 21 per cent on the Nasdaq 100.
The Russell 2000 also has the advantage of starting from a lower base. “Earnings per share on the index are forecast to grow 149 per cent next year, assuming a successful vaccine rollout, and right now I’d consider the Vanguard Russell 2000 ETF.”
Mr Valecha expects the dollar to fall relative to other currencies as the world plays catch up after a decade of strong US growth. “The Federal Reserve may also be forced to print more dollars, unless the new administration can agree a fiscal stimulus programme.”
The dollar downtrend could last several years. “This could benefit emerging markets and commodities, especially if investors are willing to take on more risk, and I’d consider the iShares MSCI Emerging Markets ETF.”
Mr Valecha also sees an opportunity in Japan, with the Nikkei 225 surging on vaccine hopes. “Japanese inflation is picking up, which is generally accompanied by a stock market rally. The iShares MSCI Japan ETF gives you exposure.”
Those wanting to invest in a resurgence of travel, leisure and airline shares resurgence might consider Invesco's Dynamic Leisure and Entertainment ETF, and two other funds. “The US Global Jets ETF focuses on the US airline sector, while ETFMG Travel Tech ETF tracks tech companies exposed to global travel and tourism.”
But don't expect instant gratification, Mr Valecha says. “Even with the arrival of vaccines, it might be mid-year 2021 before people start flying again. Nevertheless, travel shares are likely to rally before then and these ETFs could help investors lock in some gains.”
The pandemic is far from over, but if you wait until the recovery is assured before investing, you will have missed an opportunity to buy cheap shares today.
To reduce risk, only invest if you can hold for a minimum five years (and preferably longer), and don’t be too clever. A globally balanced portfolio of shares, bonds, cash and property will serve you best in the longer run, just as it did before Covid-19.