Experts divided on embracing risk following vaccine announcements

Nicholas Earl, 27/11/2020

Investors should be wary about embracing risk too early following the emergence of Covid-19 vaccines, argued Nick Watson, multi-asset portfolio manager at Janus Henderson.

Speaking exclusively to fundeye, Mr Watson suggested that people’s expectations about the speed of recovery across the global economy needed to be tempered, even if the US-based vaccines are as successful as initially forecasted.

Commenting on the destructive effects of the lockdowns on the UK economy, he outlined that the first lockdown reduced the country to economic activity levels that were last seen in 2004. This means it could take a considerable amount of time for the country to recover to the peak-2019 levels even if a vaccine enters the marketplace next year.

He said: “I do think there is a risk that the rest of the market gets too excited about this vaccine, and there's been a very big pop quite quickly. Even if it works, as people suggest with 90-95 percent effectiveness for over 65s, how that impacts the next 12 months is going to be very interesting.”

The mulit-asset portfolio manager also outlined the differences between potential vaccines and how it would affect investment behaviour.

He said: “We can only guess right now if it stops people generating symptoms? Does it reduce hospitalisations? If you find it only deals with mild symptoms and hospitalisations still happen, we're still in the same position. You can still see the NHS getting overwhelmed, in which case the government is still going to shut down. So, I certainly wouldn't want to be all in on this at the moment.”

Mr Watson's comments follow similar warnings from AJ Bell’s Laith Khalaf after the announcement of the first Covid-19 vaccine, developed by Pfizer-BioNTech in the US. He argued that investors needed to resist the urge to be more ‘gung-ho’ with their portfolios.

This outlook was not shared by Paul Jackson, global head of asset allocation at Invesco, reflecting the wide range of opinions on the investment consequences of a vaccine.

Commenting on the growing appeal of cyclical asset, Mr Jackson told fundeye that the enthusiasm was built on long-established convictions.

He said: “Cyclical assets appear to have bottomed in March, so it is perhaps too late to ask if it is too soon to embrace them. Recent vaccine news has simply strengthened the conviction that we are in the upswing phase of the economic cycle.”

Instead, he outlined that the most challenging issues came from any potential uncertainties over the effectiveness, or issues in the roll-out, of a vaccine.

Mr Jackson explained: “Perhaps the biggest risk is the threat of a consolidation phase that could see risk assets temporarily sell off, especially considering the lockdowns that are currently in place. I think a more meaningful correction would require that the vaccines prove to be ineffective (for one reason or another), thus creating the risk of a prolonged period during which lockdowns would dampen economic activity.”

Did coronavirus disprove the safe haven asset?

Alongside questions about the effectiveness of the vaccines and the general nature of economic decline in the UK, Mr Watson felt that a key challenge for anyone involved in asset location was determining what a safe haven looked like following the outbreak of Covid-19 and its effects on the investment landscape.

Assessing the general decline in performance of UK bond yields, he said: “I think we got to ask ourselves, what's do safe havens look like, as bond yields have been on a downward trend regardless of volatility here or there. If you think about UK bond yields - 10 years is, like, 30 basis points? It is a bit higher on the US, FX adjusted they are roughly the same. I don't want to overplay too much what's happened over the past couple of weeks, just because the UK’s ten-year has gone from say, 20 basis points to 34. For sure, that's a big move, going from 20 to 34, but it's not really that big in the grand scheme of things.”

This growing scepticism towards bonds was reflected in Janus Henderson’s portfolios.

He said: “We are thinking about things like value and cyclical. It is in the equity market where you going to see the biggest pop. We are under-weight in government bonds.”

By contrast, Mr Jackson argued that established defensive plays remained effective, pointing to the role gold and government debt has played since March, and felt that similar levels of performance could be expected even if the economy tipped into another recession.

He said: “Global asset class performance during 2020 (up to October 30) suggests that so-called ‘safe havens’ played their defensive role. Gold was the best performing asset class, with government debt next in line. Given that both those groups are now more expensive than at the start of the year, we can always question whether they would perform the same role again if we were to enter recession tomorrow. However, I suspect they would. Nevertheless, if the economic cycle continues to advance, I would expect the price of those defensive assets to suffer.”

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