Weekly Update - Still in the tunnel

This week’s announcement is clearly very encouraging. The partners’ vaccine has been tested on over 43,500 participants in phase 3 trials – the last phase before approval by health authorities – of whom 94 tested positive for COVID-19. Over 90% of the confirmed cases had received the placebo rather than the vaccine, suggesting an extremely high level of effectiveness – influenza vaccines are typically much less successful (see left-hand chart).

Moderna, another biotechnology company, also announced it will shortly commence interim analysis of data from phase 3 trials covering 30,000 people with over 53 confirmed cases. Hopes are high that this trial will also be successful given that the vaccine uses the same messenger RiboNucleic Acid (mRNA) technology as BioNTech’s. Moreover, there are other mRNA candidates in the pipeline from Germany’s CureVac and the Imperial College London. Among their advantages, mRNA vaccines are potentially faster to develop and easier to produce than traditional vaccines.

Of course, this does not mean that a vaccine will be available any time soon. The trials must be completed, and applications for approval lodged with the health authorities. Also, production will have to be ramped up – Pfizer and BioNTech estimate that they can have 50 million doses available by year-end and another 1.3 billion next year (and two doses are necessary for the vaccine to be effective). However, it has been estimated that global demand for vaccines could reach 10 to 15 billion doses. Moreover, BioNTech’s vaccine must be stored and shipped at ultra-low temperatures – approximately minus 75 degrees Celsius – which adds logistical complexity to supply chains.

All this means that governments are likely to be forced to keep restrictions and lockdowns in place for some time to come. Healthcare systems are already under pressure, with hospitalisation rates above or approaching April’s highs across Europe and the United States. Business confidence has dipped into contraction territory across continental Europe, driven by the slump in services, which are most directly hit by lockdowns. This means that much of Europe will slip back into recession in Q4, with meaningful recovery only likely towards the end of the winter season in the Northern Hemisphere.

The European Commission recently updated its economic forecasts for the European Union. 2020 will see the deepest recession in its history with the economy contracting by -7.4% over 2019, unchanged from the commission’s previous forecast. However, the recovery next year is likely to be slower than previously thought – up +4.1% rather than the +6.1% expansion it forecast in May. Importantly, this hinges on growth picking up in early 2021, which is by no means certain given the healthcare crisis.

However, this week’s announcement has brightened the longer-term outlook. The vaccines are likely to be reserved initially for healthcare professionals and the most vulnerable – the elderly, the obese etc. – which should relieve pressure on the health systems while vaccination begins for the broader population. Of course, many people may refuse vaccination, at least initially, but if compliance rates are sufficient – say above 40% – we should be able to look forward to some normalisation of economic activity from summer 2021.

Bottom line. The next few months are likely to prove challenging for businesses, depressing profitability and putting pressure on heavily indebted companies, especially in services. This means we should expect further bouts of volatility. However, the improved outlook from next spring will enable corporate management to begin to plan for the longer term. Financial markets tend to look forward and this welcome shift in prospects will help limit downside for risk assets in coming months.

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