What a vaccine roll-out means for the market

Following promising trial results for various COVID-19 vaccines, and approvals already flowing through, how can we expect the market to respond over coming months?

After what has been a tumultuous year unlike any other in modern history, we’re entering the home stretch and finishing 2020 with renewed optimism. At least that is the feeling around the office here at Kauri, where we are looking forward to a promising period ahead.

In recent weeks, vaccine news has been at the forefront of everyone’s minds, with a breakthrough finally coming to fruition. Pfizer, in partnership with BioNTech, was first off the ranks, delivering results that have defied all the odds.

The company has since secured UK approval for its vaccine, with US approval also all but assured. The first recipients of the vaccine have already been inoculated in the UK, demonstrating a remarkable level of progress across the medical and scientific communities. By the time you’re reading this, the first recipients in the US may have already received their vaccinations as well.

If that isn’t enough, we’ve also seen positive vaccine results from the likes of Moderna and AstraZeneca. While slightly behind from a timeline perspective, it is anticipated that these vaccines will also be given the green light in due course. It is a great outcome, buoying confidence that we can slowly move towards a new ‘normal’ and quash the virus.

While a full roll-out will take considerable time, not to mention, introduce a series of logistical constraints, it is our view this should in no way dampen confidence about the upside that now seems within reach.

From here, we anticipate that a broad-based vaccine roll-out will provide the impetus for markets to grind higher throughout 2021.

In effect, the roll-out will be the first factor that can go some way towards mending the structural damage on economies all around the world.

To date, much of the repair job has been facilitated through fiscal support from governments and central banks. While we welcome this, it’s also something that isn’t sustainable over the long-term, which makes it all the more important we’ve reached this crucial junction.

In fact, that’s why a successful vaccine program, delivered by multiple companies, is so critical towards not only controlling the pandemic, but allowing economies to fully re-open. This will bring back the confidence for businesses to invest again. It will also give consumers the confidence to get out again, and ultimately, support business.

Looking ahead to 2021

With this vaccine news proving a catalyst for markets, and the year coming to a close, it’s the right time for us to plan for the coming twelve months.

As we mentioned above, on the back of the vaccine news, we see a strong recovery for global economies in 2021. In our view, developed economies are also likely to lead the rebound, as they will have greater access to various vaccines, and since their economies were far more insulated through central bank support.

We expect that much of the recovery will be driven by activity in areas that have been hamstrung amid lockdowns this year. In that sense, we expect that industries like energy, travel and financials will play catch up as consumer demand and spending, plus movement, picks up across the board.

One of the key drivers in the year ahead will be the reopening of international borders. Although we expect governments to exercise caution in doing so, we believe there will be notable pent-up demand for travel that helps drive economic activity. In this sense, however, the countries and economies relying on tourism, may lag until such time as borders open.

Above all else, however, a successful global vaccine roll-out remains the lynchpin to achieve all this. We feel optimistic that big pharma and government will be able to pull together to overcome manufacturing and distribution bottlenecks to have made significant progress by the middle of next year.

At the same time, we expect the digitisation trends that have played out in 2020 to remain in effect. So while tech has been a standout success as far as the market goes this year, in our view, there is little reason for this to necessarily change over the coming year.

After all, we see some of the behavioural and workplace changes that have occurred as likely to be ongoing trends, including the shift to digital payments, as well as a greater work-from-home orientation than before the pandemic.

One of the common questions put to us throughout the market rally over recent months concerned the justification of where the market has been sitting. We have always maintained the view that the market is not necessarily a representation of the economy or a company at that point in time, rather, its future status. Investors have been able to look ‘past’ the pandemic as to how the economy and companies will fare on the other side.

The key takeaway for us is that timeline now seems within reach. With this in mind, we believe markets have the necessary momentum and support to continue to grind higher in 2021.

Wrapping up an eventful year

In light of all the drama and uncertainty that has beleaguered markets this year, we’re pleased to say that we’re on track to deliver another year of market-beating returns.

One of the key differentiators for us this year was our ability to move out of growth stocks into cash earlier this year, mitigating the impact of the initial crash, before then positioning our portfolio for a recovery.

We’ve been able to latch onto some of the key trends that have been unfolding amid the pandemic, including the accelerated transition towards digitisation.

Year-to-date, our Global Growth Portfolio has returned a total of 32%. In comparison, the Dow Jones has inched higher by 4.1%, while the S&P 500 increased by 12.1%. Highlighting just how integral tech has been in supporting the market recovery, the Nasdaq was 36% above the level it started the year, albeit with significantly greater volatility than we would tolerate within the portfolio.

Meanwhile, in terms of the local market, the ASX shed 2.5% between January and November this year. In comparison, the Australian Yield Portfolio has returned a positive result of 3%, with stocks like Hub24 (HUB) and Baby Bunting (BBN) among those that traded well despite a challenging macro environment, and where we haven’t been afraid to add to our holdings.

Nonetheless, what these results emphasise is one of our core philosophies here at Kauri. That is, having an agile and responsive portfolio is of the utmost importance. We still run our portfolios as long-term investments, but that doesn’t mean we sit idly by when we need to act, or when there are opportunities to take advantage of.

Signing off

This year will go down in history as one that tested the resilience of mankind. We understand many of you may have been doing it tough this year, or know someone that has been doing it tough, and we can only say that we appreciate your support through these difficult circumstances.

In signing off, the team at Kauri Asset Management would like to take this opportunity to wish all our clients a Merry Christmas and a Happy New Year.

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