The Week: Will a vaccine change the game?

Stock markets appear to be defying gravity. They have continued to rise in the face of some grim economic news. This begs the question of what they would do in the face of really good news: a vaccine, for example.

A vaccine increasingly seems like the only way out of the cycle of testing, isolating and lockdowns. At the same time, unlike some of the other options for unlocking the global economy, it also appears realistic: there are currently seven vaccines in stage 3 testing. Around 85% of stage 3 vaccines are ultimately approved. This would suggest that we are likely to have 5-6 vaccines available in relatively short order.

Could this power markets higher? There are some significant caveats. The first is whether a vaccine would actually do its job. Between the anti-vaxxers and relatively low efficacy rates (just 50% for the flu vaccine, for example), the vaccine may not be a panacea. It may not be widely available and – perhaps more worryingly – it may prompt resistance to the simple strategies that can curb the spread, such as social distancing or face masks.

However, markets are unlikely to be this nuanced. If a vaccine receives approval, investors can expect a rally in markets, even with valuations at their current elevated levels. However, it may not be the technology companies that have led markets to date that benefit. After all, most technology companies are likely to do better from lockdowns than a gentle return to ‘business as usual’.

If anything, the vaccine may see some resurgence in those companies that have been hit hardest by the virus. Travel and leisure companies, high street retail, these companies are all trading at distressed valuations, with an assumption that business will never return to normal. While they may not go back to where they were, any sign that people could move freely could prompt a significant recovery in these beaten-up areas.

Is this the catalyst that ‘value’ stocks have been looking for? It’s plausible. While the Covid-19 sword of Damocles continues to hang over the global economy, investors are unlikely to alter their pursuit of those growth stocks that can thrive in a crisis. However, the removal of the threat might make investors look a little harder at valuations.

Predicting the switch from growth to value has started to look like a mug’s game. However, history suggests that it has to happen at some point. Perhaps this is it?