Commentary

Vaccines could boost economic and market recovery

The financial markets rallied and investors rejoiced after American drug giant Pfizer, together with German drugmaker BioNTech, released better-than-expected preliminary trial results earlier this month of their Covid-19 vaccine candidate.

Pfizer's vaccine announcement is promising and there are good reasons to be optimistic. Early data from the final-stage trial showed that the drug has a more than 90 per cent efficacy rate.

For perspective, no vaccine is ever 100 per cent effective. Even the measles vaccine, one of the most successful vaccines in modern history, has an efficacy rate of about 93 per cent. A week later, American biotechnology company Moderna announced that its experimental vaccine was 94.5 per cent effective. This is important because a range of efficacious vaccines need to be produced at sufficient scale to inoculate the global population.

However, several uncertainties remain.

It is unclear how different age groups will respond to the Pfizer vaccine. Elderly people, whose immune systems are generally weaker, may not produce strong immune responses compared with younger individuals. It is also unknown whether people who have received the jabs are still contagious, especially if they are asymptomatic and do not fall ill.

The durability of the vaccine is also unclear. Regular booster shots may still be required to ensure the long-term efficacy of the drug. Potential side effects from the vaccine have not been comprehensively documented at this point.

Clarity on these concerns requires more investigation, data and time. So, while there is light at the end of the tunnel, the road ahead remains rocky for the world and investors alike.

Indeed, we expect market sentiment to vacillate between optimism that the vaccine will rid the world of the virus and fears that governments will enforce strict containment measures in the interim to contain its spread.

How quickly the global economy can bounce back from the pandemic depends on several factors.

The first consideration is how quickly vaccines can be produced and at what scale.

Essentially, this is a question of capacity.

International regulatory harmonisation as it pertains to the Covid-19 vaccine is another challenge. While national regulators have been willing and quick to streamline bureaucratic red tape and fast-track clinical trial approvals for vaccine research, a lack of harmonisation between national regulations might be a hurdle for quick implementation on an international scale.

Distribution of a vaccine is inextricably linked to pricing. Richer countries will be able to secure initial supplies more quickly than less wealthy and more populous countries.

These challenges are not insurmountable. Instead, there is a high level of confidence that governments will be able to move past these hurdles and muster the resources available to support a worldwide immunisation effort. But it takes time and it is unlikely to be a smooth ride. Ultimately, until a vaccine can be widely distributed and administered, containing the virus will be a top priority.

While near-term economic activity might still take a hit from such targeted containment measures, we do not expect a repeat of the historic levels of economic contractions we saw in the second quarter of this year.

Effective therapeutics, social distancing measures and a robust contact tracing regime will remain essential as a bridge to a vaccine.

In addition, with the election hump largely out of the way, there should be further clarity to the United States' policy outlook. President-elect Joe Biden's decisive victory and steadfast focus in dealing with Covid-19 should bolster investor sentiment.

Market volatility will remain a fixture. Ultimately, investors should not miss the forest for the trees.

But the longer-term outlook is certainly getting brighter.

Hence, it is the time to engage in higher-risk investments, which underpins our positive view on equities generally. In the face of turbulence, investors should diversify the timing of their market entry by adopting a dollar cost averaging approach.

Investors should take advantage of volatility to accumulate more stocks during pullbacks and fewer stocks when markets rise.

Investors should also consider diversifying their investments into economies that have successfully contained the virus - such as China, South Korea, Hong Kong and Singapore - as they might be well-placed to eliminate Covid-19 entirely and quickly once a vaccine comes through.

Finally, promising vaccine news had triggered a violent rotation out of growth sectors and into value and cyclical stocks. The initial vaccine euphoria has gradually petered out as the focus shifted to concerns related to the near-term Covid-19 resurgence. Yet, the rotation to value may not be done entirely and could gain momentum if vaccine developments surprise on the upside.

While it is difficult to time such trades, it might be prudent for investors with large exposure to growth sectors like technology to rebalance their portfolio gradually into cyclical and value stocks.

• Vasu Menon is the executive director of investment strategy at OCBC Bank.

A version of this article appeared in the print edition of The Straits Times on November 24, 2020, with the headline 'Vaccines could boost economic and market recovery'. Subscribe