• The weekly percentage increase in new cases continues to trend higher. Hospitalisation and ICU patients are on pace to exceed the severity of the first two wave. This indicates that virus spreads are escalating.
• There are room for optimism. The Pfizer/BioNTech vaccine could precede the success of similar mRNA technologies, has promising efficacy of 90% and could accelerate the race to find the next vaccine ‘winner’
  
• The huge divergence between value and growth stocks may allow value stocks to catch up in price performance when things ‘normalise’. But investors have to dig in for the longer term. We believe that the positive impact from vaccines may not materialise until around end-Q1 or early Q2 next year.
  
• Investors would do well to adopt a balanced investment strategy, in our view. They may diversify some capital to value stocks while maintaining exposure to growth stocks such as technology.

What’s next after elections

Post-elections, Covid-19 cases continue to spike in the U.S. Biden has formed a task force to bring the pandemic under control. But plans can only be executed after he officially takes office in late January next year. Meanwhile, Trump may be more focused on disputing election results than keeping the pandemic under control. With few measures in place till then, there could be a further escalation of cases.

1. Resurgence could get worse -> Vaccine in focus

Where are we headed? The weekly percentage increase in new cases continues to trend higher with no signs of plateauing (Figure 1). This indicates that virus spreads are escalating. The current autumn season and coming winter season could provide an environment for increased contagion as people are confined indoors by the colder weather and shorter daylight. Hospitalisation and ICU patients have also trended up with the third wave and are on pace to exceed the severity of the first two waves (Figure 2).

Will the U.S. lock down like Europe? We believe a nation-wide lockdown in the U.S. is unlikely. Near term, Trump is still in control, and he is definitely in no mood for a lockdown. When Biden does take over, he aims to empower the CDC to guide states on restrictions, depending on the ‘degree of viral spread’.  He favours state-based restrictions to minimise the economic pain for businesses. Biden also leans towards Dr. Fauci for advice and Dr. Fauci favours public-health measures, not national lockdowns.

In the worst case, there could be restrictions or selected lockdowns in several high-risk states. There are currently 12 at high risk. In the event of rampant state lockdowns, fiscal stimulus is crucial to mitigate the economic impact. Without it, the economic recovery may drag out and stocks may fall back closer to 3,200 for the S&P 500.

Glimmer of hope. As of now, optimism on Pfizer/BioNTech vaccine has overshadowed the resurgence. Investors are optimistic as this vaccine:

1. Could precede the success of similar mRNA technologies. Pfizer/BioNTech is an mRNA vaccine. Its success may be mirrored in the trial results of other mRNA vaccines being developed by Moderna (Phase 3) and CureVac (Phase 2).
2. Has an efficacy of 90%. This towers above the 40-60% for normal flu vaccines and the FDA’s approval criterion of 50%. Although more patient data being collected may distort future results, a 90% efficacy does provide ample leeway for meeting the FDA’s criterion.
3. Could accelerate the race to find the next winner (Figure 3). Other vaccine companies will be under pressure to deliver so as not to “lose out” and lose revenue opportunities. The current U.S. resurgences also highlight the need for more vaccines. This may hasten the pace of vaccine development and any positive news flows may drive further rotation to value stocks.

Investors have to dig in for longer term. We believe that the positive impact from vaccines may not materialise until around end-Q1 or early Q2 next year. Our rationale is:

1. Limited manufacturing capacity. Pfizer hopes to produce 50mn doses in 2020 and up to 1.3bn doses in 2021. As the vaccine requires two doses per person, only 25mn people worldwide can potentially have access to it in 2020. Manufacturing and distribution will take time. Herd immunity requires 70% of the population to be immunised. We may not get there until mid-2021.
2. Timeline for gaining protection. Protection from Covid-19 kicks in 28 days after vaccination. The incubation period of Covid-19 is 5-6 days on average. If no proper control measures are in place, the virus will still spread faster than the rate of vaccination in the near term.
3. Still early days in efficacy results. More time will be needed for additional data to be collected, to provide more accurate representation of the vaccines’ safety and efficacy. It remains unclear how long their protection can last. Phase 1 clinical trials of the Pfizer/BioNTech vaccine also showed that immune response was lower in older people. As it is still early days, many questions remain.

RECOMMENDATION

Investors would do well to adopt a balanced investment strategy, in our view. They may diversify some capital to value stocks while maintaining exposure to growth stocks such as technology. Why value stocks? Any positive vaccine news subsequently may highlight a quicker-than-expected resolution to Covid-19 and reinforce further shift towards value. Value and growth stocks have made an uneven recovery from Covid-19 since end-March. Their huge divergence may allow value stocks to catch up in price performance when things ‘normalise’ (Figure 4).

That said, investors have to be in for the longer term. The mass distribution of vaccines will take time and their positive impact may not be felt until around end-Q1 or early Q2. Until then, virus resurgences and tech stocks’ resilience during this pandemic can continue to gain traction.

Longer term, the trade-off between value and growth may not be justified, as both are still positively correlated. Based on the S&P 500 Value and Growth Index, their 5-year and 3-year correlations are 0.8 and 0.4 respectively.