New virus variants are stoking COVID-19 angst, but we see vaccination programs opening the door to economic and market recoveries.
The development of multiple COVID-19 vaccines cheered markets late last year, with efficacy levels that exceeded expectations. Investors are now focused on the counterforces of vaccine rollout vs. virus variants. Data scientists and healthcare analysts from BlackRock Fundamental Equities are tracking the trends around the world to form a view for the road ahead.
Vaccination milestones: 20-30-50
The immediate purpose of vaccination programs is to lessen the severity of the disease and relieve the stress on public health systems, allowing lockdown measures to be lifted. Based on our analysis, we expect mortality rates to come down once 20% of populations – the most vulnerable – have been vaccinated. The number of intensive-care patients in hospitals should drop once about 30% have been vaccinated. It may require 50% of the adult population to be inoculated before the pressure on hospitals can fall significantly.
Outlook for re-opening
We find the impact of vaccinations starts to filter through to the COVID data within roughly a month. This accounts for the time it takes for immunity to set in and the difference in the number of vaccinated vs. non-vaccinated.
Ongoing vaccine rollouts – combined with localized lockdown measures – means the data could improve enough for UK restrictions to be lifted around April, when we see a 50% drop in hospital admissions, as shown in the chart below. Restrictions could ease slightly later in Europe given some problems with vaccine production. The U.S. sits somewhere between the two and varies by state. While only about 35% of vaccines distributed in the U.S. had gone into arms at the beginning of January, that number increased to 50% by month-end. We see this improving further as rollout continues. Israel is the global leader in vaccinations and the impact on hospitalizations and other key trends is encouraging.
Plotting the positive impact of vaccinations
Estimated reduction in COVID-related hospitalizations through Q1 2021
Potential game changers
We see potential for more upside than downside. Approval of the Johnson & Johnson and/or Novavax vaccines would provide enough total supply to cover developed markets by the end of 2021. In particular, the Johnson & Johnson vaccine is administered in a single shot and would rapidly speed up immunization efforts. Trial data released at the end of January showed the J&J vaccine has 85% effectiveness against severe disease. Distribution could potentially begin in early March.
Tracking virus variants
Viruses mutate to survive, so the emergence of COVID-19 variants is not unusual. Clinical data has shown current vaccines demonstrate efficacy against the known mutations – at diluted degrees, but still enough to provide immunity. In addition, the technology used for the vaccines means adaptations can be made quickly. All vaccine companies are now working on new vaccines that could be ready this summer. All of this gives us confidence that vaccination programs will continue to do the hard work of combatting the virus and facilitating economic and market recoveries this year.
A stock picker’s market
We expect an economic boom after COVID restrictions are lifted. Ample cash on the sidelines ready to be released, coupled with fiscal stimulus efforts in Europe and the U.S., should also bolster consumer spending. We could experience a type of global, synchronized growth not seen since 2005. This means sectors and regions that have underperformed since the 2008 global financial crisis could take off – and some sectors that have enjoyed a stellar run may begin to lag. This, we believe, sets the stage for a stock picker’s market, one where differentiating between winners and losers will matter more to portfolio outcomes. We identify three themes worth watching:
Supply/demand winners. A strong economy would benefit companies that can rapidly speed up production to meet newly unleashed demand and raise prices as supply remains limited. We see opportunities in industrials, materials, chemicals and semi-conductors – where supply is low and demand high thanks in large part to a flourishing market for electric vehicles.
Travel and leisure beneficiaries. We believe consumer demand is set to soar in 2021 and into 2022 as restrictions are lifted and unemployment rates fall. People are eager to vacation and dine out in the company of friends. Restaurants should come out of the pandemic with improving margins and revenue. We also like the luxury companies poised to benefit from travel.
The winners that can keep on winning. This isn’t a normal recession, and that means many of the past decade’s winners can keep winning – and even benefit further from trends accelerated by the pandemic. Examples include businesses involved in digitization, as well as e-commerce companies and certain gaming companies in Asia. Not all will keep pace, as demand was simply pulled forward for some products and services. Selectivity is key, and our active equity investors are deploying their deep research and expert insight to identify and capitalize on market dispersions.
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