Despite positive vaccine development news, uncertainties remain for financial markets
The effectiveness of COVID-19 vaccines under development, at around 95%, is much better than what we had expected; seasonal flu vaccine effectiveness has been around 50% in the US.
At the same time, COVID-19 case counts are taking off, both in the US and many other regions globally, and the trajectory can be seen as concerning from both a societal and financial markets standpoint.
This leaves financial markets in a continued period of uncertainty and volatility. The likelihood of recessionary tail risks (which is always present in financial markets) feels elevated today, especially when you consider that stocks are at near-record-high valuations, and corporations have near-record high debt levels and margins.
However, interest rates are low, consumer balance sheets are in good shape and central banks continue to be accommodative, so if we are able to navigate through the tail risks until the vaccine is widely distributed in a year or two, we may be left with a good setup for equities that could offer investment opportunities for long-term investors.
The market is still underappreciating key elements of the recovery
There is still much we do not know about the COVID-19 virus and the vaccines in development, such as the long-term safety of those vaccines (which is getting a lot of attention right now).
However, the market is really underappreciating the duration of immunity. How long will the vaccine protect you? Many experts today think that somewhere between one and three years of immunity is reasonable, but the reality is that we do not know. If immunity lasts only a few months or if the virus mutates, the current generation of vaccines might prove ineffective.
At the industry and sector level there are unknowns related to long-term consumer preference, i.e. we have seen consumer preferences change during the pandemic out of necessity, but they might actually be a better way to do things over the longer term. Areas such as airlines and cruises, and hotels are the ones in the headlines, but consumer preference changes could be much more pervasive across every industry.
A return to a relatively normal lifestyle is not going to happen with the flip of a switch. There could be a slow progression; lower-risk activities may likely come back faster than higher-risk.
The winners and losers are still to be determined and will be over the next few years
There are still a lot of unknowns, but we are starting to see some opportunities in companies where management can really capitalize on this brief period of rather rapid change by investing in the future and setting up their companies to be fundamentally better off over the next decade or longer.
An example is in the life science tools and diagnostics equipment manufacturers, which are companies that manufacture the highly complex instrumentation and equipment that we are using to combat this virus, including COVID-19 diagnostic test manufacturers. Many of these companies are reinvesting COVID-19-related profits in talent and technology that can enable new scientific discoveries. Where we have confidence in the capital allocation abilities of management, we see opportunity for these companies to take share in a growing pie of global life science research and development spend. We find this space attractive compared to the vaccine manufactures themselves, where higher levels of competition are likely to make long-term profitability more challenging.
Another example is in digital health and telemedicine. The pandemic has exposed some inefficiencies in the way health care is delivered globally. With the use of technology such as on-demand video with a physician, remote monitoring of patients via an internet-connected medical device, etc., better-quality care can be delivered in a more convenient, lower-cost manner in certain circumstances. There are a few companies that are enabling this digital transformation of health care that we find attractive today.
More generally, companies are using technology differently. They are connecting with their customers and suppliers differently and every facet of operations is being impacted in some way by the pandemic. Some of the new ways of doing things are going to be less effective than prior ways, but other ways are likely to be better. Understanding how companies are positioning themselves for long-term growth is key to investing.
MFS focuses on the long term
During the pandemic, markets have been more volatile and short-term oriented, which creates an opportunity for us to find long-term value. And although it will be challenging to find companies at attractive valuations that are positioning themselves to be better off over the next decade, our long-term focus and global cross–asset class collaboration will potentially enable us to do this. The portfolio management team leverages our global experience for perspective on things like what management teams are saying, what valuations are implying about companies in similar industries across the globe. It helps to identify at the outset emerging trends that might have broader global applicability.
A good example of this was during the March 2020 market lows, when it was unclear which companies would make it through the pandemic. Connecting with the portfolio manager’s fixed income analysts almost daily to analyze things like liquidity, debt covenants and maturity schedules helped us make more informed long-term decisions. The long-term focus and culture of global cross–asset class collaboration that we have at MFS are important differentiators, particularly at a time of heightened uncertainty and volatility.
MFS or MFS Investment Management refers to MFS Investment Management Canada Limited and MFS Institutional Advisors, Inc. This article was first published in the United States by MFS in march 2021 and is distributed in Canada by SLGI Asset Management Inc., with permission. This document is provided for information purposes only and is not intended to provide specific financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard and does not constitute a specific offer to buy and/or sell securities.
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