The superforecasters of the Good Judgment Project believe there is a 93% probability we will have an FDA-approved Covid-19 vaccine in a year, and enough of it to inoculate 25m people in the US. This is up from just 20% in the dark days of April.
A widely available vaccine is the most important hurdle to getting the economy back to normal. No vaccine, no v-shaped recovery. To foretell the conclusion – a return to normality looks under-priced.
In theory, the market is forward-looking and sees an economic rebound. The market has rallied, but the companies leading the charge benefit most if we never return to normal. Let me explain…
Which will win?
The leaders have been the lockdown winners, from e-commerce to subscription-based technology businesses. We have worked up a sweat on Peloton, whilst waiting for our Ocado delivery to eat dinner in front of Netflix.
If you think about it, these surging stocks imply investors do not have much confidence in a real economic recovery. If the market and the economy is going to come roaring back, companies such as Zoom may continue to do well, but there are surely others, currently suffering, that stand to benefit significantly more from things getting better.
So, we think if you want to play a vaccine recovery, which is the role equities perform in our portfolio, these stocks are not the obvious choice.
We think the market is pricing perceived certainty very highly. Either certainty of growth, as in technology, or certainty of low revenue and earnings volatility, as in consumer staples.
The flipside is a valuation opportunity in uncertainty.
Today one can buy stocks which are sensitive to Covid-related factors and the economic cycle for near record low valuations. The probability of a vaccine and therefore a real economic recovery is rising and yet the stocks for whom this would be most beneficial continue to languish. From a portfolio perspective, there is a clear opportunity in such stocks.
As we move closer to a medical breakthrough, we think these types of stocks might shoot up, spelling a big V for vaccine. If no medical breakthrough occurs, then the market bounce since March looks very fragile indeed.
Duncan MacInnes is an investment director at Ruffer
Ruffer LLP is a limited liability partnership, registered in England with registered number OC305288 authorised and regulated by the Financial Conduct Authority. The information contained in this article does not constitute investment advice or research and should not be used as the basis of any investment decision.