- World looks very different now as interest rates and bond yields are much higher
- Since the vaccination announcement, commodities have beaten equities and equities have beaten bonds
- The FTSE 100 has done better than the NASDAQ Composite
- Pfizer and BioNTech have round tripped and given up all of their share price gains (and more)
“On 9 November 2020, Pfizer and BioNTech announced they had developed a vaccine for Covid-19 and share prices surged around the world, even if they had already bottomed in the spring after a short, sharp correction,” says AJ Bell investment director Russ Mould. “Investors are now showing Pfizer and BioNTech precious little gratitude, because their share prices are languishing, and the overall investment landscape looks very different now three years on. Commodities have outperformed equities and equities have outperformed bonds, and portfolio builders must now decide whether these trends are set to continue or not.
“Pfizer and BioNTech may have won the undying gratitude of pretty much everyone when they made their announcement three years ago, but the world has now moved on from facemasks and lockdowns, even if hybrid working is still with us and governments are encouraging their people to take top-up jabs.
“Pfizer’s latest quarterly results (31 October) were noticeable for a big drop in revenues and $5.6 billion in inventory write-downs, both related to lower demand for Covid vaccines, and BioNTech cut its guidance for 2023 when it reported its own third-quarter numbers (6 November). Both shares have given back all of the ground they gained in 2020 and 2021 (and more).
Source: Refinitiv data
“The economic outlook has changed, too. Massive fiscal stimulus programmes and Covid-19 relief measures, coupled with additional monetary support in the form of zero interest rates and further quantitative easing (QE) resulted, as it turned out, in too much money chasing too few assets and too few goods, with the result that inflation finally reared its head, after 40 years of lying dormant. Asset bubbles formed and the price of goods and services soared, helped along the way by the war in Ukraine, the subsequent spike in oil and commodity prices and further damage to global supply chains.
“Spooked central banks had to switch course, raise interest rates and, in many cases, launch Quantitative Tightening schemes, to cool economies, money supply and ultimately inflation.
“The world looks and feels very different from November 2020 and asset prices reflect this new reality.
“Since Pfizer Monday, commodities have done better than equities and equities have done better than bonds. Bitcoin has surged, buoyed by the search for assets with a finite or slow-growing supply, or at least something that central banks could not print or just conjure out of thin air. Meanwhile, the era of zero interest rate policies (ZIRP) seems to be over.
Source: Refinitiv data
“The end of that 13-year experiment with ZIRP and QE, not surprisingly, means that what worked from an investment point of view during that period – bonds, long-duration assets like technology, growth stocks – has found the going tougher since its end.
“Conversely, investment options which had done poorly – commodities, cyclicals, value – have tried to stage a comeback and companies which revelled in cheap debt or financial engineering have come unstuck, while firms with sound balance sheets and rising interest income have thrived.
“Note how the unloved, derided FTSE 100 – packed with miners, oils, banks, insurers and consumer staples – has outperformed the technology and bio-tech laden NASDAQ Composite over the past three years.
Source: Sharepad. Capital return in local currency.
“By sector, within the FTSE 350, commodity plays such as oil and industrial metals have done well (given a helping hand by the exclusion of Russian supply from global markets), while banks have revelled in a period of rising interest rates and improved net interest margins. An economic recovery post-lockdown has been welcomed by Industrial Transportation firms, consumer-facing companies and also aerospace firms, as global tourism picks up. Defence stocks have also gained a boost from conflicts in both Ukraine and the Middle East.
Source: Sharepad
“Individual stock performance mirrors many of these trends, with banks, oils and miners to the fore, along with retailers and idiosyncratic value plays like Beazley, where rising bond yields help income and the rising cost of money reduces the supply of capital and the amount of competition it faces (a situation that can also be seen at Centrica, many of whose rivals have failed).
“Among the losers, growth stocks like Ocado, Spirent and Ceres Power stand out, as do other perceived lockdown winners like gambling services provider 888, along with heavy borrowers such as TUI.
“Investors must now decide whether inflation and higher interest rates are with us to stay or not. Growth stocks do not seem entirely sure, given how well America’s Magnificent Seven of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla are doing in 2023 and how the S&P 500 Growth index is refusing to give way to the S&P 500 Value index, after the latter’s attempt to assert itself in 2022. The relative performance of these two benchmarks could yet provide a valuable clue as to how the macroeconomic, policy and market outlook will develop from here, and whether the world really is going to look very different in the 2020s from how it looked in the 2010s, from an investment point of view.
Source: Refinitiv data
“Another relationship which could give a strong hint as to whether we are in a brave new world that favours value, cyclicals, and commodities over growth, technology and bonds is the one between the Bloomberg Commodity index and the FTSE All-World equity benchmark. Commodities outperformed in the 2000s, equities in the 2010s and raw materials look to have started a fightback in the 2020s.”
Source: Refinitiv data
