“Bliss was it in that dawn to be alive, But to be young was very heaven!” Investors’ excitement over Pfizer’s announcement echoed early views of the French Revolution. But as in 1789, the euphoria is unlikely to last.
We focus on Brent as the global benchmark.
Brent closed up at 42.63/bbl, after peaking above $45/bbl on news of the vaccine.
The balance of risks, however, remains firmly to the downside. Demand is not picking up, new production continues to come online in Libya and US drilling rig counts increased once again . Even OPEC has reduced its demand forecast for 2021 by a further 300,000 bpd.
This week, we publish our quarterly auto industry analysis in our flagship pH Report. It confirms the increasingly rapid take-up of electric vehicles (EVs) as they enter the steep part of the adoption S-curve. EVs and hybrids were 25% of the European market in September, selling more than diesel for the first time.
Oil/gas companies hoping the gas will be the fuel of the future are also going to be disappointed. The authoritative International Energy Agency’s annual Renewables report confirmed that solar and wind energy are rapidly replacing fossil fuels in electricity generation:
“Total installed wind and solar PV capacity is on course to surpass natural gas in 2023 and coal in 2024“.
WATCH FOR: More refinery closure announcements as oil companies adapt to the rise of electric vehicles
We focus on the US S&P 500 Index as the world’s major stock market index.
It was another record week for the S&P, which closed up 2.2% at 3585. Reflecting the risk-on mentality, the VIX volatility index fell back to 23.
However, beneath the surface, investors were starting to rethink their big bets on the FAANMGs stock, which have powered this year’s rally:
- Investors took positive news on a Covid-19 vaccine as the signal to take some profits on tech stocks
- Banks and energy stocks went higher, as investors bet on an early economic recovery
Excitement is never a good reason to buy the market. And the market’s vaccine euphoria last week ignored the reality of rising Covid infections today – and likely into H1 – before any vaccine can start to have a real impact. When a calmer mood returns, investors will also no doubt realise that sectors such as travel, leisure and real estate are in the middle of long-lasting structural changes, which will create both Winners and Losers.
WATCH FOR: The ‘vaccine euphoria trade’ to get a further boost from news of more vaccines in the pipeline. But oil stocks may come back to earth rather quicker.
We focus on the US 10-year rate, as this is the “risk-free” benchmark for global markets.
The rate closed up again at 0.89%, having soared to 0.97% on Tuesday, as vaccine euphoria led investors to assume ‘happy days are here again”.
Junk bond yields also fell as optimism rose over economic recovery. But the MOVE bond volatility index was almost unchanged at 43 – signaling some investors remained cautious.
In reality, the “vaccine euphoria” overlooks the fact that the pandemic will get worse before it gets better. The European economy is already turning down as lockdowns increase, and President Trump’s hands-off approach is unlikely to change – suggesting President Biden could inherit a highly-charged position in 2 months’ time.
WATCH FOR: High-yield spreads and the MOVE Index may give early warning that euphoria is giving way to reality.
Spare a thought for poor Samsung. Increasingly cash-strapped consumers can no longer afford its so-called “affordable luxury”:
- It hasn’t the products to go up-market and compete with Apple
- And its cost-base is too high to enable it to survive against Chinese competition
Samsung’s problem is that the global population is no longer growing because more babies are being born. Instead, it is growing because of increasing life expectancy. People no longer die around pension age, as they did in 1950. As we discussed 2 weeks ago, a whole new generation is alive today, the Perennials 55+ generation:
- There are 1.4bn Perennials today. And there will be 1.9bn by 2030
- Their incomes go down as they retire
- So they can’t afford to change their phones every time a new model comes along
- Instead, they mainly prefer to buy low-cost if they need a replacement
Every company on the planet is being impacted by this change. Some will be smart and change their business models. Others will go bust as their hopes for a return to “business as usual’ are disappointed.
WATCH FOR: Investors looking for the famed “ten-baggers” should be watching for companies focused on supplying the Perennials.