Market Update

With covid-19 cases rising, promising developments on the vaccine front and US election results, we thought it was a good time to provide a brief market update.

Let’s start with the bad news; cases, hospitalizations, and deaths are all trending worryingly higher. This has led to restrictions and targeted lockdowns which are likely to slow the economic recovery. Furthermore, while the US election has now been called in favor of Democrats, US politics is as divisive as ever with Trump refusing to concede and supporters backing him. We could be in for an extended period of un-rest in the US. Fortunately, markets are forward looking and there’s reasons for optimism.

PFIZER VACCINE 90% EFFECTIVE

The big story today and primary reason for this commentary is the news that Pfizer and BioNTech’s collaborative vaccine was shown to be more than 90% effective in preventing symptomatic cases of covid-19. While we expected good news on the vaccine front, 90% efficacy is far better than even the most optimistic projections, especially when you consider the underlying mRNA vaccine technology is new and no vaccines of it's kind are currently approved for human use. That said, this is based on interim analysis of an ongoing trial by an independent data-monitoring group which has not yet been peer-reviewed.

This news increases the probability that other vaccines in various phases of development (11 in phase 3 alone) will also be successful. This matters because one vaccine will likely not be enough to immunize the entire global population, and this vaccine in particular must be stored at 94 degrees below zero. This requires ultracold storage and distribution systems that may run into capacity issues in developed countries and are virtually non-existent in developing ones. The vaccine also requires two doses taken roughly three weeks apart, further stretching medical resources.

In short, the arrival of safe and effective vaccines is now within reach.

Pfizer will apply for emergency use authorization by the end of November, with approval likely by year-end at which point 50M doses should be available due to mass manufacturing efforts underway since October. These initial doses will likely be prioritized for high-risk groups and health care professionals. Projections are for another 1.3B doses in 2021, enough to vaccinate 50% of the developed world with the required two doses. We expect additional vaccines to be approved to help bring this number up and are hopeful some single dose vaccines without the need for ultracold storage will become available to help in developing markets. Our base case remains that this pandemic will largely be under control by summer 2021.

US ELECTION RESULTS

PORTFOLIO POSITIONING

The vaccine news and US election results are generally positive, so as you might expect risk-on assets like stocks are up and risk-off assets like bonds and gold are down. Overall our portfolio positioning hasn't changed much since this summer. There lots of reasons for long-term optimism, but short-term risks remain. As such, we have a fairly balanced approach right now. We're neutral equities but with a tilt towards value, emerging markets and gold miners. On the income side we're max underweight bonds and overweight mortgages/preferred shares. All of these investments have benefited from the risk-on sentiment except gold, which we own as a hedge against some short-term risks and the possibility of rising inflation (see Q2 commentary).

This is how prudent portfolio management is supposed to work. If every investment you own is up at the same time, that's not real diversification. You don’t want to put all your eggs in one basket because things could easily, and still might, turn out differently. Fortunately, most of our eggs are currently in the reflation/risk-on basket so overall these developments have benefited our client portfolios. Our goal has always been to position portfolios for what is most likely to happen, while protecting against the "unknown unknowns". This can be a difficult balancing act, but so far we have been successful despite what is arguably the most volatile year on record.

If you'd like help with your investment portfolio, or you have any questions or comments, please do not hesitate to reach out.