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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Will the Covid-19 vaccine change the long-term trends?
Peter Garnry
Chief Investment Strategist
Summary: In today's equity update we take a look at the market reaction to the news from Pfizer announcing great results on its Covid-19 vaccine. Good news has been bad news for the markets with many trades reversing causing a big jolt to momentum and technology stocks. However, is this short-term reaction the start of something longer term with value outperforming growth/momentum, or European equities suddenly outperforming US equities? In our view the long trend since 2009 is not broken and technology stocks will continue to deliver the best risk-reward ratio for long-term investors. The key risk is obviously where interest rates go as growth stocks are more sensitive to interest rates.
The news yesterday from Pfizer announcing that its Covid-19 vaccine is 90% effective significantly exceeding the market expectations of 60-70% gave a big jolt to equity markets. S&P 500 jumped more than 3% on the news driven by the energy, financials, and industrials sectors. Sitting opposite this reaction function was technology stocks with the Nasdaq 100 futures correcting significantly lower with the weakness extending in today’s session. As the chart below shows, European equities are benefitting the most from the vaccine as the European economy is hit hard from Covid-19 and generally European equities are more cyclical than the overall US equity markets.
The market reaction over the past 48 hours beg the question whether many of the assumptions among investors are wrong and whether many “obvious” trades will reverse over a longer period. If one zooms out the Covid-19 and the vaccine news could suddenly give the impression that technology stocks are not worth owning any longer. But looking at it from a longer time perspective US technology stocks have had explosive earnings growth since 2009 while also being more immune to crises such as the euro area crisis in 2011-2012, emerging markets and USD in 2015, and lately Covid-19. This long-term trend will not change because of a vaccine and thus investors will likely revert to the same conclusion which is that this is the fastest growing segment of the market and where the future lies. We remain positive and overweight the technology segment and still sceptical of European equities still dominated by financials. The key risk to our positive view on technology stocks over the next year is rising interest rates which will have larger negative impact on growth stocks than value stocks.
In the short-term a lot views will LAO be updated for the travel and leisure segment across the world. The table below shows the general positive price action today in Europe across this hard-hit segment. Due to the vaccine uncertainty in terms of safety and delivery this segment will likely experience a lot of volatility in the coming months providing excellent trading opportunities.
The chart below is for regulatory purposes
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