Global markets surge on back of successful vaccine trial

Profit-taking sharply pushed down shares that have benefited from the pandemic.

Profit-taking sharply pushed down shares that have benefited from the pandemic. Picture: iStock

Share prices and bond yields surged as encouraging corona­virus vaccine trial results added to a pro-risk environment that emerged after the US election, but profit-taking sharply pushed down shares that have benefited from the pandemic and the local bourse pared most of its intraday rise as US futures fell.

Australia’s S&P/ASX 200 index closed up 42 points, or 0.7 per cent, at an eight-month high on Tuesday, after rising 2.2 per cent to 6438.2 as the major US share indexes surged to record highs on the news that an mRNA vaccine against the coronavirus developed by Pfizer achieved more than 90 per cent efficacy in a large-scale trial — a result that US infectious disease expert Anthony Fauci called “extraordinary”.

Despite the economic risk from record new cases of the virus in Europe and the US, the lags involved in the production and distribution of coronavirus vaccines and the uncertainty about their long-term effectiveness, investors became more confident about the economic outlook and also saw less need for central banks to extend their asset buying programs that are currently under way.

Australia’s 10-year bond surged a massive 15 basis points to a two-month high of 0.92 per cent, making the financials sector the second strongest behind energy, as safe havens including the yen, Swiss franc, gold and government bonds were sold in favour of equities and crude oil.

But apart from the fact that the local bourse retreated sharply from its early high after similar moves on Wall Street, the gains were mainly in “COVID-19 losers” that stand to benefit from economic reopening, while shares of “COVID-19 winners” that benefited from social distancing lost ground.

“The Pfizer vaccine looks very promising but the vaccine is not going to immediately eliminate COVID-19 around the world,” Credit Suisse macro strategist Damien Boey said.

Still, investors re-positioned for a faster normalisation of world economic growth and also saw a distant prospect of higher interest rates from the Federal Reserve.

“The momentum sell-off is the worst one-day purge in recorded history,” Mr Boey said.

“Crowded large-capitalisation technology names — that would benefit from lower-for-longer rates — are badly underperforming, while cyclicals that stand to benefit from an effective vaccine and reopening efforts globally are outperforming.

“Smaller companies are outperforming because the small and mid-capitalisation universes are far less crowded by passive investors concentrated in the large-capitalisation universe by virtue of index weights skewing composition towards heavy technology names.”

Goldman Sachs Australia equity strategist Matthew Ross said that, beyond an improvement in sentiment and domestic consumption, an effective vaccine would allow an earlier removal of international border restrictions that have weighed heavily on ­education, tourism and housing demand.

Still, he said the more defensive parts of the market through the crisis — shares of companies with growth, strong balance sheets and “stay-at-home” products and services — had tended to be resilient to improving vaccine news this year. “So far at least, this suggests that a better vaccine outlook will support a ‘catch-up’ rally for the laggards lifting the market, as ­opposed to a large sell-off in those pockets that have gained the most during the pandemic,” Mr Ross said.

Investors looking to position for a positive vaccine outcome should consider stocks with features that have been most correlated to vaccine optimism where consensus expectations for an earnings recovery are currently most subdued. Among the biggest companies in that list are: Westpac, ANZ, NAB, Scentre, Sydney Airport, Woodside, Santos, Oil Search, Qantas, Ramsay Health, Tabcorp, BlueScope Steel and Crown Resorts.

On Tuesday, investors poured into beaten-down real estate stocks, with shopping centre owners and companies exposed to Victoria the biggest winners.

In a dramatic trading session, French shopping centre owner Unibail-Rodamco-Westfield soared 43.55 per cent to $4.12 as dissident investors won a proxy battle, effectively rejecting management’s call for it to raise €3.5bn ($5.7bn) in fresh equity. Hedge funds that held short positions scrambled to cover their exposures and the company signalled it would come through the worst of the crisis.

Local retail property stocks followed suit, with those that had been hard-hit by the Melbourne lockdowns among the largest gainers.

Vicinity Centres, which owns a half stake in Melbourne’s landmark Chadstone Shopping Centre alongside billionaire John Gandel, jumped 14.53 per cent. Rival Scentre Group, owner of the local Westfield malls, was also up strongly with its stock lifting by 14.52 per cent.

Diversified groups that have an exposure to Victoria, including GPT (which rose 9.79 per cent), and office powerhouse Dexus (which was up by 8.08 per cent) lifted on expectations they would bring shoppers back into malls and workers back into the office towers more quickly.

Dexus CEO Darren Steinberg dubbed the vaccine news a positive sign but said it was still “early days” in the recovery towards a “new normal”.

“This new-found confidence is good for the economy and also good for office occupancy and ­future intentions of businesses,” he said. “It provides a way for the new normal to be with us sooner.”

Meanwhile, JPMorgan said the US sharemarket now had one of the best outlooks for sustained gains in years. “After a prolonged period of elevated risks — global trade war, COVID-19 pandemic, US election uncertainty — the outlook is significantly clearing up, especially with news of a highly ­effective COVID-19 vaccine,” chief US equity strategist Dubravko Lakos-Bujas said

After encouraging phase-three trial results from Pfizer and BioNTech, he sees a rotation out of COVID-19 beneficiaries and into value stocks.

Confirmation of a Biden White House with legislative gridlock would be a “goldilocks outcome for equities, a market nirvana scenario”, he said.

Global central bank policy remains supportive, with rates to remain at zero with ongoing QE.