The Vaccine Effect: End of growth stocks in 2020 Q4?
Updated: Dec 20, 2020
Solomon Wong examines why high-growth technology stocks will continue to rise in value amid expansionary economic policies, the US presidency Biden-Harris transition and recent vaccine developments.
As Pfizer and Moderna announced the efficacy on their latest vaccine trials last week, there has been a drastic shift from growth stocks to value stocks in the market. What is the difference between growth stocks and value stocks? Growth stocks are faster-growing, higher risks companies that are anticipated to grow at a rate above the average market rate, whereas value stocks refer to companies that are larger, more well-established that are trading at a lower price relative to their fundamentals. Following the vaccine news, growth stocks such as Square (NYSE: SQ) and PayPal (NASDAQ: PYPL) tanked by 13% and 10% respectively during 6-10 Nov, whereas among the value stocks, Wells Fargo (NYSE:WFC) and Exxon Mobil (NYSE:XOM)’s value jumped by 10% and 12% respectively. The rationale behind this movement is straightforward: demand for technology services could slow down when the pandemic is under control. The stock prices for traditional companies are more attractive now, as there is hope for recovery in those industries. Will the vaccine news continue to weigh down on the growth of technology stocks in 2021? Here are three reasons why I think this situation is unlikely to happen:
1. Expansionary economic policies from the central bank continues to add liquidity in the market
Facing headwinds of rising Covid-19 cases, economies around the world are responding by cutting interest rates to nearly-zero levels and creating liquidity in the financial markets. As seen in the graph below, the accumulation of cash on balance sheets of the Fed and ECB have increased by 3 trillion USD. This amount of money flows into each respective stock market through quantitative easing, which creates an abundance of liquidity in the economy that drives the price of certain assets to go up.
It seems unlikely that the central banks are going to tighten their spending. In the US, the nomination of Janet Yellen as US Treasury Security will be in favour of expansionary monetary policies in the coming months. In the UK, the Bank of England has just launched another £150bn stimulus package amid the reintroduction of lockdown. Hence, this stimulus-based growth will continue through to the end of 2020.
2. Biden’s presidency presents a bull case for the stock market
As dust settled on the US presidential election, investors are optimistic about a more harmonious Sino-US relationship and a less fractious international trade environment. For instance, US President-elect Joe Biden is likely to take a more friendly diplomatic approach and revoke tariffs previously put in place by the Trump administration. This development is particularly good news for Chinese technology companies that were previously caught in the crosshair of the trade war, for example, Tencent, Huawei Technologies, ByteDance, as well as US technology firms that are highly exposed to the Chinese consumer market, for example, Apple and Microsoft. Also, the Democratic sweep in the White House increased the chances of a larger-than-expected $3 trillion stimulus package being passed in the Senate, which hopefully will invigorate the battered American economy.
3. Despite vaccine development, the pandemic is likely to persist to next year
The market has reacted positively to the vaccine news so far, as investors bet on the possibility of a ‘V-shaped’ full recovery afterwards. However, there are still many questions regarding whether the vaccine will work as expected. First of all, the vaccines are required to be stored at -90°C, and two shots must be administered three weeks apart, which suggests huge logistical difficulties, especially in developing countries. Secondly, the percentage of people in the population who will receive the new vaccine is still uncertain, as the willingness of the whole population to get it is not guaranteed. With cases continuing to spike in the US and Europe, the pandemic will persist into 2021. It is clear that the global economy is not recovering back to normal in short-term foreseeable times.
While positive vaccine development will revive short-term momentum for traditional value stocks that have been out of favour, consumer confidence remains low and there is still a long road ahead for the vaccines to have a tangible impact on the economy. As the UK braces for a second round of lockdown, social distancing will continue to benefit FinTech companies — as demand for online payment and e-commerce continues to increase in the coming months. Therefore, unless there is a thorough breakthrough in the COVID-19 situation, technology stocks are still going to reign supreme in the financial market, for the time being.
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