How Does The Vaccine Affect The Financial Markets?

Written by Tomas M Koolhaas, MBA

It’s been a tumultuous year so far, to say the least. Against the backdrop of heightened tension in US-China relations, a deep pandemic- induced recession and highly contentious US Presidential elections, we were nearing the end of a business cycle with growth slowing down leading investors to flock towards defensive assets.

However, ever since much has happened. The recovery of the financial markets, the outcome of the elections and the news in terms of a vaccine has boosted confidence. In the immediate aftermath of the vaccine news, investors pulled out of defensive assets even further and poured cash into markets that are closely tied to economic growth. According to the top infectious disease expert in the US, Anthony Fauci, the shot being developed by Pfizer will have a major impact on everything we do with regards to the coronavirus going forward. Investors are expected to take advantage of pent up demand, the start of a new business cycle, the recovery of economies and new fiscal and monetary support.

While Pfizer’s announcement was certainly cause for optimism, it’s important to note that the reaction of the financial markets is preliminary as the vaccine has yet to complete phase 3 trials, be approved, produced and distributed. In addition, there are still unknown factors in terms of the second wave, what the recovery of economies will look like, the size of new stimulus, the transition of power of President-elect Joe Biden, the impact of increasingly high levels of government debt and Brexit. Furthermore, the road out of COVID is unlikely to be easy and the prospect of a vaccine isn’t enough to put an end to the economic challenges created by the pandemic. Nevertheless, looking at the current economic, geopolitical and pandemic state of affairs, the outlook is increasingly optimistic, enabling investors to benefit from forecasted growth. At the same time, opportunities are fragmented thus investment styles like stock picking and active management are becoming more valuable.

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