Vaccine and ‘work’ hesitancies the next challenges
Risks for stocks are elevated. Few would debate this. Valuations for Standard & Poor’s 500 stocks — according to data service provider FactSet, currently at 21.4 times forward earning — are higher than both the five- and 10-year averages of 18.1 and 16.2 times respectively.
Yet, US stocks have been inching inexorably higher this year — even though there is intermittent profit- taking — and leading global markets broadly higher. Case in point: The market saw another sharp selloff last Monday but recouped lost ground in the following days. All three major bellwether indices — the Dow Jones Industrial Average, S&P 500 index and Nasdaq Composite — remain not too far from all- time record- high levels.
A main reason behind last week’s volatility is fears that the Delta variant, which is driving a renewed surge in Covid-19 cases, will derail, or at least delay, the global economic recovery. Indeed, we are seeing the re-imposition of more stringent restrictions in parts of the world, particularly where the percentage of population vaccinated remains low.
Vaccine hesitancy is a real risk. As economies reopen, more and more people will come into contact with each other, making it easier for the virus to spread in the community. The number of infections will rise, as will hospitalisation, which will, in turn, dampen economic activity.
Positively, data shows that current approved vaccines remain highly effective against variant infections and, importantly, hospitalisation and death. So, we do not think rising new cases will significantly reverse economic reopening as countries ramp up vaccination efforts. Indeed, we believe it will be a Herculean political challenge for the Western world to revert to locking down its people who are fully inoculated. It simply is not happening.
That said, what we are now witnessing is a pandemic of the unvaccinated. Hopefully, those still hesitant on vaccine will be motivated to get the jab in the face of rising risks of infection and severe illness (see “Vaccination — the only way to save lives and livelihoods” for a more in-depth discussion).
The world must be prepared to live with the Covid-19 virus, which seems likely to become endemic. And vaccine remains the best protection one can have against it.
Besides vaccine hesitancy, there also appears to be work hesitancy in the US. News media have highlighted anecdotal evidence indicating a rising number of job vacancies despite a high unemployment rate, suggesting that many people are not actively looking for a job. Companies have had to raise wages and offer sign-on bonuses and perks to attract workers (see Charts 1 and 2).
We have written about this before. The labour shortage is likely to be due to a combination of factors, including generous government benefits and excess savings during the pandemic, concerns for contracting Covid-19 and/or childcare responsibilities (as long as schools and day care centres remain closed). People may have got so used to not having to work and still getting free money from the government that they prefer extended lockdowns. Interestingly, data also shows a surge in alcohol sales during the pandemic (see Chart 3). It remains to be seen how long these negative effects will persist — and, therefore, what is the longerterm impact on businesses, if any.
For now, overall sentiment for US stocks remains optimistic, underpinned by the strength in corporate earnings and modest inflationary expectations.
After falling 11.2% in 2020, earnings are rebounding very strongly — up 52.5% in 1Q2021 for the S&P 500 companies. Analysts have been repeatedly revising upwards their forecasts on the back of better-than-expected results. Heading into the reporting season for 2Q2021, earnings were expected to grow 63.3%, now revised to 69.3% following robust results from the financial sector (the first major sector to report) over the last week.
The 2Q2021 may be peak earnings growth — owing partly to 2020’s low base effect — but earnings will continue to grow for the foreseeable future, by an estimated 36.6% in 2021 (to well above pre-pandemic levels) and 11% in 2022. And as long as earnings continue to expand, we think stock prices will move higher.
Prices for many commodities may be peaking. Chip shortages, which have caused new and used car prices to surge, are widely expected to ease over the coming months. Recent agreement between Opec+ members to raise production output by 400,000 barrels per day each month (from August) to meet rebounding demand should also keep a lid on prices going forward. These will, in turn, temper inflationary pressures, which we still believe is mostly transitory, and alleviate the need for the US Federal Reserve to raise interest rates sooner than expected. In short, most indicators remain constructive for US stocks to perform in the near to medium term.
Over time, the Global Portfolio will have to consider the relative effect of a sharply divided world. Inequitable vaccine distribution has highlighted the chasm between the rich and poor. So, while major developed economies are reopening with quick vaccination rollout, many emerging countries are lagging far behind. That said, it is quite possible that, ultimately, vaccine takeup rates could lag in countries where “freedom of the individuals prevails over those of society” compared with those where society’s interest takes prominence. The percentage of population vaccinated will determine not only which countries can reopen and rebound faster, but also whether the recovery is sustainable, thereby giving them more enduring competitive advantages. We will revisit this subject in a future article.
The Global Portfolio declined 1.2% for the week ended July 21. The biggest losers were Taiwan Semiconductor Manufacturing Co (-5.2%), Singapore Airlines (-3.8%) and Walt Disney Co (-3.6%). On the other hand, Builders FirstSource (+7.1%), Home Depot (+2.2%) and ServiceNow (+0.7%) ended the week higher. Total portfolio returns since inception now stand at 58.7%. The Global Portfolio is still outperforming the benchmark MSCI World Net Return Index, which is up 53.8% over the same period.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.