UAE: With better vaccine prospects now, has the worst passed for stock markets?

UAE: With better vaccine prospects now, has the worst passed for stock markets?

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A stock market graph. (For illustration purposes only.)
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Dubai: The current boost in optimism after a couple of recent developments on effective COVID-19 antidotes is evidently propping up stock markets. But the doubts are how long will the gains last and what takeaways investors should keep in mind when it comes to vaccine-related news going forward.
Stock markets that went through massive declines in the early days of the COVID-19 contagion have recouped most of their losses in subsequent months with selective gains in certain stocks.

As the weeks go by, the timeline for a coronavirus vaccine is getting shorter and this is driving optimism. With a vaccine seen widely available by early 2021, analysts say it may not be long before the timeline on vaccine availability shifts from 12 to 18 months to more like within 6 months.

This is what is currently encouraging investors to return to stock markets, especially those who largely accumulated losses in their investment portfolio in the past months. But what does that mean for those who are currently invested in the markets or looking to newly invest?

What’s next for investors, markets?

Over the next month or two, analysts also add that although investors are likely to face conflicting narratives of a worsening pandemic in some parts of the world, but the good news remains that there will be more clarity around the timeline and effectiveness of an eventual vaccine.

While it’s possible that markets, like they were in March, will be wary about knock-on effects from the pandemic hurting economic activity, employment and corporate profits, investors are seen having comparatively more confidence to ride out any short-term hiccups and focus on long-term profits.

So, with many seeing a light at the end of the tunnel, markets will look past whatever deterioration we get in the short-term with their focus turning towards an end to the public health crisis and a stronger economic recovery in 2021. In short, market trend-watchers only see the stock market rising and disregarding short term volatility or dips, here on out.

Stocks’ true reaction to vaccine news

Analysts at Switzerland-based investment bank UBS rolled back the market tape to take a look at how stocks have reacted to positive and negative vaccine-related news since the coronavirus pandemic hit. And, as expected, optimism around vaccine developments helped key global market benchmarks to take back the ground it lost during the stock market’s pandemic-inspired plunge.

The US benchmark S&P500 index, whose moves are largely tracked by other stock markets worldwide, are ending the weeks at record highs as vaccine-related news keep coming in, returning to trade above levels seen before falling nearly 34 per cent from a February 19 record to its March 23 low, as the spread of COVID-19 forced the near-shutdown of the global economy.

How much have markets priced in a vaccine?

By pricing in a vaccine, what it means from an investor perspective is how much markets are seen further gaining on vaccine-related developments – or in other words, can markets go even higher on the new and upcoming vaccine-related news, or is this it for markets rallying on vaccine propsects?

The UBS analysts calculated the impact by measuring the number of “shock” days, in which the S&P 500 moved up or down by at least one standard deviation versus its average daily movement in reaction to positive or negative vaccine-related news.

Using their model, which gauges how much positive vaccine news contributed to a fall in a closely followed economic policy uncertainty index, they concluded that investors had priced in a 33 per cent to 40 per cent probability of a vaccine. Meaning, there is still scope for further certainty to be factored in.

On an industry level, however, it appears prospects for a vaccine are less priced in, the analysts said. They noted that shares of companies with the most to gain — such as hard-hit hospitality and leisure stocks — from a vaccine have barely outperformed since May, suggesting a vaccine isn’t really priced in across industries, they wrote.

What sectors gained, what didn’t?

When coming to what sectors gained, and what didn’t, during the pandemic – it was largely observed that defensive and technology stocks comparatively gained more as compared to the others in the past few months of the crisis.

What are defensive stocks?

A defensive stock is a stock that provides consistent dividends (profit-based company shareholder returns) and stable earnings regardless of the state of the overall stock market. This includes well-established companies, such as global conglomerates like Procter & Gamble, Johnson & Johnson, Philip Morris International, and Coca-Cola, are considered defensive stocks.

While investors holding onto such defensive stocks, stayed invested, based on confidence that the stocks can ride out any crisis, those having earlier invested in certain technological stocks that benefitted from a consumer shift online this pandemic amassed gains as well. Examples include online retailers like Amazon, Alibaba, remote conferencing platform provider Zoom Video Communications and social media platform Facebook.

Considering valuations is key

However, one key lesson investors learned this pandemic is that considering valuations of company stocks is more important than what they earlier thought.

What does it mean by considering valuation of a stock?

By stock valuation, what this simply implies is the method of calculating theoretical values of companies and their stocks, based on key profit-based and key payout metrics, among others. Sometimes companies are valued even higher than they should be, meaning when the stock is traded on the markets the share price gets exorbitantly priced or becomes highly inflated due to number of unrelated external factors.

Putting this in context of the pandemic and vaccine-related news, some of the already overvalued stocks might face selling pressure (meaning decline in share prices), while some company stocks that were impacted due to business shut-downs and shrinking consumption are likely to make a comeback as the economies recover post-pandemic.

Back to balance sheet basics

Another integral investment lesson asset managers reiterate that investors had learnt this time around, is studying the balance sheet of companies even further to detect discrepancy in numbers, while not forgetting about key balance sheet figures and related metrics.

Looking into a company’s operating history and industry environment may just as well be the difference between reaping significant gains or avoiding future losses. Newbie investors are often tempted to give up when they are bombarded with a series of technical jargons when deciding to invest in the stock market.

A company’s gross, operating and net profits indicate how efficiently it converts revenues to the bottom line.

Knowing the key metrics

Gross profit is the difference between sales and cost of goods sold. Operating profit is the difference between gross profit and operating expenses, such as administration and marketing. Net profit is the difference between operating margin and non-operating expenses, such as interest and taxes. Successful companies maintain profit margins through good and bad economic times.For example, if a company has increased its advertising expenditures to launch new products or expand into new markets, its sales should increase proportionately. If not, profitability and cash flow will suffer. When researching stocks, look for companies that manage to grow their margins each year.

What’s the verdict for investors?

The overall theme investors should stick to is how stock markets going forward will continue to be impacted by macro trends, now more than ever, be it uncertainty or positivity surrounding global events. However, this is what portfolio managers have recommended in the past.

However the difference is now, investors should also ensure to keep a close eye on micro fundamentals as well.

What does such an analysis entail?

An analysis of micro fundamentals starts by considering the current price of a stock and comparing it to measures of value, like the key metrics of a certain stock, meaning the current price of a stock is compared to its dividend, its earnings, and to its assets resulting in valuation ratios such as its dividend yield, price to earnings ratio and its price to asset ratio.

The result and valuations can then be compared among stocks in the same industry groups; undervalued and overvalued stocks are identified by comparisons to the industrial norm. After this analysis, you then attempt to predict industry and economic developments that may positively or negatively impact the stock current price. Hence, making you as investors comparatively better positioned and informed to take a decision to buy or sell the stock, at an ideal price, in the days and weeks to come.

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Original news source Credit: gulfnews.com



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