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Growth, value stocks are largely pricing in vaccine hope, says UBS

The vaccine may induce a serious frontloading of the rally before logistical challenges or slower growth normalisation begins to bother markets
Global growth and value stocks are pricing in the development of a vaccine to combat the Covid-19 pandemic, says a November 10 note by UBS.

"Value stocks are now pricing in 60 – 70 per cent possibility of a vaccine, while Growth stocks are at around 85 per cent. US Growth stocks are pricing in the most hope of normalisation, while European and US Value stocks are pricing in the least, and therefore should have more upside potential," analysts at UBS wrote.

Pfizer's announcement earlier this week that its Covid-19 vaccine, which is still under development, appears to keep nine of 10 people from getting the disease sent global equity markets rocketing over the past few days. Since Monday when the news broke, global markets have surged up to 9 per cent, data show. The up move partly has been on account of Democratic candidate Joe Biden's victory in the US presidential poll, which analysts feel should boost emerging market equities in the hope of a stimulus from the US Federal Reserve (US Fed).

"The most important thing for financial markets in coming quarters is how the US Fed responds when the American economy rebounds after the health crisis has passed. GREED & fear’s base case remains that it will be a dovish response, which is dollar bearish," wrote Christopher Wood, global head (equity strategy) at Jefferies in GREED & fear, his weekly note to investors.

A regards the vaccine, though it will not be easy to get the 3-4 billion doses required for the next year, and preparing for minus 80 degree Celsius storage will be tough, UBS believes the market will look through these challenges in the short-term and discount  normalisation of activity fully before potentially fine-tuning lower to acknowledge these logistical challenges.

"The vaccine may induce a serious frontloading of the rally before logistical challenges or slower growth normalisation begins to bother markets," UBS said.

Booster dose for emerging markets

Emerging market (EM) equities, UBS believes, are likely to get 'turbo-charged' as the hunt for a vaccine to treat Covid-19 infections gains momentum. Besides India, the vaccine news, their analysts said, is incrementally positive for Mexican and Brazilian equities, where the Covid-19 shock has compromised fiscal balances and undermined private sector confidence. Among regions, Korea remains their favourite market to position for global trade normalisation.

"Assuming a rapid vaccine rollout, we could see MSCI EM index at 1,500 by end-2021, or upside of 28 per cent, underpinned by positive earnings momentum," UBS said.

Among sectors, UBS remains mindful of chasing indiscriminately and prefers to look for stocks that have not had a debt surge and are thus better risk-adjusted.

Airlines, hotels / leisure, autos and components, energy, household durables, apparel, industrials (most segments), banks and consumer finance are most positively geared to a vaccine. On the other hand, staples, pharma / biotech and telecom are the least sensitive to a vaccine and are likely to continue to lag; followed by utilities and REITs.

"Tech and communication services are not the best expression of the positive vaccine trade at current valuations. However, we still prefer sustainable growth stocks over defensive stocks as the recovery likely becomes further entrenched," UBS said.


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