V-shaped ‘value’ in a vaccine?

We have been highlighting the wide ‘Value vs. Growth’ performance and valuation spread for some time now. Even though we felt there was a catalyst on the horizon, it is always difficult to identify it before the event. The recent news on Pfizer vaccine development could just be such a catalyst.

COVID-19 interruption has been an incremental headwind to the Value style. ‘Stay-at-home’ stocks, like Netflix, Amazon and Facebook, all traded on expensive valuation multiples pre-COVID and performed well throughout lockdown(s). There has also been a ‘flight to safety / quality’ driven by low interest rates and the uncertain macro environment. Travel and leisure, general retail, oil & gas, and financials – sectors at the more ‘value’ end of the market – have all struggled this year due to direct forces (shutdown) or for more indirect reasons (low-interest rates).

The recent vaccine news means that markets can start to price in a post-COVID world. This will, undoubtedly, be good for many of the value sectors I’ve mentioned above.

Having said this, near-term uncertainties remain. We still need safety data and regulatory approval – likely, but not 100% guaranteed – and then there will be operational and logistical complexities administering a vaccine on such a large scale.

Combining this with the ongoing political, economic and monetary policy uncertainties, means that, while we are very upbeat with respect to the vaccine news, we don’t necessarily believe the economic recovery will be a perfect V-shape, nor that the Value style will rebound in a straight line. There will, no doubt, be speed bumps along the road.

Therefore, from a stock selection perspective we continue to back companies with balance-sheet strength, robust business models and those trading on attractive valuations.