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How COVID vaccine will impact various asset classes

How COVID vaccine will impact various asset classes

How COVID vaccine will impact various asset classes
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By Ankit Gohel  Nov 17, 2020 5:54:45 PM IST (Published)

With a vaccine for COVID-19 vaccine finally in sight, investors appear to be reshuffling their portfolios to position them for a likely recovery in the economy and uptick in corporate earnings.

With a vaccine for COVID-19 vaccine finally in sight, investors appear to be reshuffling their portfolios to position them for a likely recovery in the economy and uptick in corporate earnings.

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The US-based biotechnology firm Moderna Inc on Monday said its vaccine candidate has been found to be 94.5 percent effective in preventing COVID-19, based on Phase 3 trials. This came just a week after Pfizer Inc and BioNTech SE announced that their vaccine candidate was more than 90 percent effective in preventing COVID-19.
Global equity markets have already reacted to the vaccine announcements by Pfizer and Moderna, and are trading near all-time highs. The commodity and currency markets, too, will be impacted if the COVID-19 vaccine trials are successful going ahead.
Here is the impact on different asset classes of the COVID-19 vaccine:
Equity
Global equity markets are already in the throes of a bull run in anticipation of a breakthrough in the quest for the coronavirus vaccine. Back home, most listed companies have shown a marked improvement in their second-quarter financial performance. This has led many to believe that there will be earnings upgrades by analysts and this should help sustain the current momentum in stock prices.
Investor sentiment has also been boosted by policy measures such as the expansion of the Production Linked Incentive (PLI) scheme to additional 10 sectors, tax reliefs for real estate developers and homebuyers, subsidy announcement of Rs 65,000 crore for fertilizers, among others to boost the domestic economy in the long-term.
Kunj Bansal, Business Head, PMS - Equity, Karvy Capital is of the view that the markets have factored in all these positive developments.
“The valuations of the market are high and it is in favor of risk in the short term. The rally in an economy facing stocks is over and now the focus will shift to their performance. However, in the medium-to-long term, the markets will grow,” Bansal said.
According to him, the market will not gain unless it is backed by strong demand and fundamentals. He expects consumer durable, FMCG, auto and IT stock will do well going ahead.
On September quarter earnings, Bansal added that earnings of cement, consumer durables, and insurance companies were a surprise.
Commodity
As the economic activity is expected to gather steam, analysts see a pick up in demand for industrial commodities to strengthen further. Most importantly, copper and crude oil demand are expected to bounce back. This could possibly tempt the OPEC to tweak the supply just enough to keep crude prices firm.
“Copper and crude oil will perform well going ahead. We are bullish on these commodities for the next year. On MCX, the copper price may rise towards Rs 630-640 level. Meanwhile, WTI crude oil is expected to witness $45-$50 level and Brent oil $50-$55 level,” said Amit Sajeja, AVP Research - Commodities & Currencies, Motilal Oswal.
Bullion
Gold prices are still expected to rise as it may see increasing investment demand rather than safe-haven appeal. Investors would tend to diversify their investment portfolio and gold is still a better option, Sajeja added.
Gold, considered a hedge against inflation and currency debasement, has gained over 24 percent this year, mainly benefiting from global stimulus to cushion the effect of the pandemic. This liquidity is the market expected to rise further which may support the gold prices.
US Dollar
The ongoing monetary easing, stimulus package in the US and widespread distribution of COVID-19 vaccines could weaken the US dollar.
“When viable, widely distributed vaccines hit the market, we believe that this will catalyze the next leg lower in the structural USD downtrend we expect,” Citibank said in a research note adding, “Given this set-up, there is the potential for the dollar’s losses to be front-loaded, with the USD potentially falling by as much as 20 percent in 2021.”
Bonds
Analysts expect risk-on sentiment to play out negatively in short term with the US bond yield moving higher gradually. A rise in inflation expectations, because of stimulus measures, will push yields higher (and by corollary, bond prices lower) and as such prompt investors to hedge currency exposure.
Against this backdrop, currency traders will quickly move to curtail losses from the possible fluctuations in currency movements, especially the US dollar which is expected to weaken in the near term.
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