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Covid-19: Where will the market go from here?

16 November 2020

Last week was a game-changer in global markets. Monday’s announcement from Pfizer and BioNTech of robust results from their late-stage trial for the Covid-19 vaccine outweighed rising cases, hospitalisation and deaths caused by the virus.

Investors are increasingly looking beyond the next few months. With more candidate vaccines likely to show positive results over the upcoming weeks, there is now more certainty that the pandemic will come to an end as soon as next year.

When and how the vaccines will be distributed remains unknown. So far, such details are having little influence on markets that look well beyond the short term. Investors finally see the light at the end of the tunnel, and they are reacting accordingly.

Airlines, hospitality, finance, energy and retail sectors have been among the hardest hit in this pandemic and were the ones that surged the most following the vaccine news. On the other hand, tech stocks that benefited the most from Covid-19 underperformed the broader market last week.

Whether this rotation will continue or prove to be temporary over the short run is debatable. However, longer-term, there still seems to be good value in holding cyclical and economic sensitive stocks. When combining the impact of a vaccine with continued fiscal and monetary support, earnings will possibly grow by double digits in 2021 compared to the tech industry which will struggle to beat their 2020 performance.

Another source of headache for growth stocks is the rising bond yield environment. The higher bond yields go from here, the lower investors will be willing to pay a premium for the growth factor. However, bond yields remain far from their long-term averages and are likely to stay low well into 2021.

While tech firms are set to underperform as life returns to normal, this doesn’t mean investors should dump them entirely from their portfolios. They will continue to play a significant role in diversification, being one of the most capitalised and least leveraged sectors, through generating bumper cash flows. I agree that valuations have become overstretched for many tech stocks, but they remain the ones with the highest earnings growth prospects over the longer term.

News flow over the vaccine, lockdowns and the US Presidential transition are all sources of volatility in the next several weeks. However, this may create good opportunities for buying the dips.



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