Vaccine, Brexit and the Economy - T&T Quarterly Market Update - Q3 2020
by Thomas Quinn on Oct 16, 2020
Est. Reading Time 7 Minutes.
In a quarter where we’re ever-increasingly consuming information and communicating in written form via a screen 60cm in front of you, I have chosen to cut the preamble and jump straight into the content of this quarter’s review.
The topics covered are:
- Quarter by Numbers
- Vaccine Update
- The Environment and Investing
Quarter by Numbers
These last 12 weeks have showcased the benefits of global diversification.
US equities (S&P 500) are up is 9%, the UK (FTSE All-Share) fell 3%, Asian equities are up 10% and European equities have returned 2%.
Asia and the US have had incomparable responses to the virus, with most Asian countries firmly locking down, mandating mask-wearing and slowly reopening with robust contact tracing teams controlling the outbreaks. Without a coordinated federal response, the policies in the US have been determined and implemented on a state level and vary drastically with most opting for limited lockdowns and giving businesses and people the choice on how they want to live through this.
The UK has had less severe lockdowns compared to some of its EU counterparts. Masks have recently been made mandatory in most indoor environments and government stimulus has kept unemployment incredibly steady at 4.5% (rising just 0.5% since March 2020), However, the damage of lockdowns have hurt businesses.
Commodities (Bloomberg Commodity Index) are up 9% over the quarter, US bonds (US Aggregate) have returned 2.7% and Global REITS are up 1.7%.
Broadly, global equities, global bonds, commodities and real estate are all in positive territory for the quarter.
Alas, the world has not crumbled! Which is not the message portrayed on the TV of course!
Source: Standard & Poor’s, MSCI Asia ex-Japan, FTSE, Cmdty: Bloomberg Commodity Index, Global Agg: Barclays Global Aggregate, REITs: FTSE NAREIT Global Real Estate Investment Trusts, MSCI
As things stand, 142 vaccines are in pre-human trial, 35 are in phase one, 19 in phase two, 11 in phase three and 0 approved.
Phase 3 is when thousands of people are given the vaccine to assess side effects and effectiveness. Typically it takes 10-15 years to bring a vaccine to market; in the 1960s a vaccine for mumps took four years and this vaccine still holds the record.
Of the 11 vaccines in phase three, having all shown clear effectiveness to fight the virus, you may hear of the University of Oxford, Pfizer and Johnson & Johnson as being the leading trials to bring the vaccine to market.
University of Oxford
While it was developed at the University of Oxford, AstraZeneca will be responsible for scaling up and distributing this vaccine; they are aiming for 1 billion doses. The vaccine has shown strong immune responses and minor side effects. 50,000 people are expected to receive the vaccine and they remain optimistic on a Q1 2021 finish. The trail has been paused but pausing a trial is fairly routine in trials of this size.
The US government have signed a $2 billion contract with Pfizer to produce 100,000 doses of their vaccine by December 2020. 44,000 people are expected to receive the vaccine and they ultimately hope to supply 1.3 billion doses globally by the end of 2021. They are looking for volunteers across the US and they also plan on testing this in children under 12.
Johnson & Johnson
The company is building on the technology used in its Ebola vaccine to deliver 60,000 doses for phase three. They’re focusing on a vaccine that requires just one dose, and tests in monkeys provided ‘complete or near-complete’ protection. The trial was paused on October 12th but they stated this was typical of large clinical trials.
The World Health Organisation and political leaders must now weigh effectiveness Vs time. Vaccines rarely offer 100% immunity, however, out of the trails there will be more effective vaccines than others, and it’s very likely the first might not be the best. The consensus appears to be around 70%-80% effectiveness would be good and we’ll only know these numbers once phase three trials are completed for each vaccine.
Over Quarter 3, the advancements in the development of a SARS Covid-2 vaccine has been incredibly positive and Quarter 4 will firm up time frames for our trips down to CVS to be pricked.
2020 has been the year of the ‘Transition Period’ for the UK and the EU. All former EU rules apply and the countries remain aligned whilst a deal can be negotiated giving businesses, people and governments time to adjust to an impending departure from the block of 27.
The year was in theory laid out, timelines established and negotiations began with the mid-October EU Summit pencilled in as a time to put pen to paper.
The last two weeks in the lead-up to the Summit have involved high-level calls between Boris Johnson and Ursula von der Leyen (President of EU Commission), leaders who have not spoken for months, signalling a positive sign that a deal would be struck.
The result of the talks were upbeat. Ursula stated the most difficult issues ‘are still completely open’ but ‘íf there is a will, there’s a way’ and Boris told the Times he was ‘pretty confident´ they would strike a deal.
As the two-day Brussels event kicks off, Johnson has let slip that he would reflect on the result of the EU Summit before making a decision, going against his rhetoric in September that mid-October would be THE date a deal would be reached or the UK would commence no-deal plans.
As I write this it’s crunch time and soon we are likely to know the outcome of the Summit and direction the UK and EU go from here. The real date in question though is December 31st before the transition period ends so talks can ensue until then, however, the UK from a weaker position having backed down from the mid-October deadline.
What we could see…
A deal is still expected, both sides want a deal, the UK and EU are already aligned and they’re key to one another’s short-medium economic outlook. A deal is priced in somewhat with GBP:USD at $1.29, where a no-deal could send GBP fall through $1.18 and a deal moving cable to $1.35-$1.40.
So our guess, and it is a guess, is a deal will be struck and an extension on the transition period to March-July 2021 agreed, giving UK and EU businesses, already juggling a winter pandemic challenges, time to adjust.
That being said, it’s politics so it’s emotion, gut and feelings driving these negotiations, so a no-deal is still an uncomfortably likely outlook.
The Environment and Investing
2020 looks to be the second warmest year on record with wildfires, heatwaves and extreme weather events galvanising public support towards a shift to a lower-carbon environment.
Experts believe that temperatures will increase by 3% by the end of the century blowing past the 2% limit set out in the Paris Climate Agreement. Global leaders are aware that they’re falling short on their promises.
The policy shift will come, the billions/trillions will be spent, and governments are increasingly turning to carbon pricing policies to raise this money and disincentivise the use of high-carbon activities. This carbon tax will affect businesses who are dependent on fossil fuels and it will be positive for businesses who switch to less-carbon intensive production.
Some countries are ahead of others in their shifts towards carbon-neutralrality, namely China and the EU presenting opportunities in these regions. Since 2016, when the Paris Climate Agreement was signed, the MSCI World Climate Change Index has outperformed the MSCI World Index. That being said recent outperformance shouldn’t be a reason for investing in more environmentally conscious funds.
Investors may increasingly need to review how their investments are exposed to this shift and whether they believe they want make a change to more environmentally conscious investments.
By all means, please be in touch with any and all questions and concerns. In the meantime, thank you—as always—for being clients of Taylor & Taylor USA.