Too much market optimism
It’s been another good day for global investment markets.
News of a second effective vaccine, Moderna which shows nearly 95% effectiveness, has buoyed investor sentiment.
Like the Pfizer/BioNTech vaccine, Moderna uses the experimental RNA virus genetic code to provoke an immune response.
Shares in Moderna rose 7% on the news, with the FTSE 100 index of leading company shares up by 1.66% today and the Dow Jones Industrial Average up 1.34% at the time of writing.
As with the Pfizer vaccine news last Monday, businesses which will benefit from a return to normality did well to, with British Airways owner IAG and Cineworld both up by around 11%.
Is there too much optimism from global investment markets?Investment markets have a nasty habit of overreacting to good news and bad news. Things are rarely as good or bad as first believed. Click To Tweet
The good news about vaccine progress needs to be tempered by a variety of factors.
The results from these vaccine trials are currently marketing bumpf from big pharma, and not peer-reviewed data.
There is a significant logistical challenge associated with producing and distributing the vaccines. The Pfizer vaccine must be kept in ultra-cold storage, with the Moderna vaccine also needing a cold storage solution (albeit not quite as cold).
It will take time for vaccinating a large enough proportion of the population to make a meaningful difference to current social distancing measures.
With each of the Pfizer and Moderna vaccines requiring two doses, 21 days and 4 weeks apart respectively, it could take a year or longer to jab enough people in the UK to keep the wider population safe.
As we have seen in the past 24 hours with the news that Prime Minister Boris Johnson is self-isolating for 14 days following his exposure to a Covid-19 positive colleague, we still have a long way to go.
Johnson presumably carries antibodies, or at least T-Cell immunity, from his brush with Covid-19 earlier in the year. Yet he is self-isolating.
The Pfizer and Moderna vaccines create the same T-Cell immunity as suffering from Covid-19, admittedly in a safer fashion, but arguably to a lesser extent than our bodies generate by beating the virus.
The absence of rapid testing as a solution to breaking Johnson’s self-isolation is another concern, as this accurate system could confirm he is negative and safe to be released back into the world.
On the plus side, supporting market valuations is the massive amount of quantitative easing confirmed by central banks; recently the extra £150 billion of bond buying from the Bank of England.
In the European Union, leaders are fighting to release a €750bn coronavirus recovery fund, blocked today by Poland and Hungary who vetoed the EU budget because of a clause tying EU funding to adherence to the rule of law.
With both countries under EU investigation for undermining the independence of courts, media and non-governmental organisations, they risked losing access to billions of euros in EU funding, if the budget went ahead with that clause in place.
Many market valuations look expensive right now. There are likely to be volatile times ahead and the exit from the Covid-19 pandemic is unlikely to be smooth sailing.
There’s a reasonable chance that investors have celebrated a little too early, and a little too much, at the news of these vaccines and their progress through final stage trials.
Time will tell whether record high equity market valuations are justified.