How much economic damage can a Covid-19 vaccine repair?

Moderna, Pfizer-BioNTech and now Oxford-AstraZeneca, arriving like buses with not one but three successful early vaccine trials in quick succession, and forecasts of a mass roll out by spring. Miraculous, but it may not be enough to resurrect the sickest parts of the economy.

To parrot a now ubiquitous metaphor, vaccine advances have been a shot in the arm for equities. Aviation and hospitality stocks were already buoyed by the Pfizer breakthrough when Moderna revealed its vaccine is 95% effective, sending share prices sharply higher.

As Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, points out: “It’s had a dramatic effect on the share price of companies worst hit by the pandemic.”

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On the day Moderna announced, shares in British Airways owner IAG rose 11% and aircraft engine manufacturer Rolls-Royce by 10%, on hopes the global travel industry will recover much faster than feared.

Premier Inn owner Whitbread also climbed by 8% and pub chain JD Wetherspoon by more than 5%, as investors forecast the lockdowns depressing trade will become more limited.

Markets were less fussed by the Oxford-Astrazeneca results largely due to a badly worded press release downplaying the results. But overall, the message was exuberance.

Water under the bridge?

Jeremy Lawson, Aberdeen Standard Investment chief economist and head of its research institute, says the reaction is “broadly sensible”, a nod to the light at the end of a very long, dark, tunnel, where social distancing and its associated economic disruptions become the exception not the norm.

But he cautions “there is a lot of water left to flow under the bridge” before vaccines are rolled out and inoculation becomes life changing.

Covid-19’s economic damage – from aviation to car manufacturing, hospitality and retail – has been severe. Britain’s was 8.2% smaller in September than pre-lockdown, according to the Office for National Statistics’s latest report on 12 November, despite recovering since April.

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Consumer-facing services fared slightly better than others in September, it reported, despite pretty much halving in size in April during the strictest restrictions.

However, similar to the economy as a whole, growth in these areas has lost momentum since the summer.

A tug of war

“Markets are in the middle of a tug of war,” says Matthew Cady, investment strategist at Brooks Macdonald. Better vaccine news has boosted out of favour cyclicals and value stocks as investors have given them another look.

“But,” he points out, “in the near-term the pandemic continues to hold back the economy, and businesses and consumers are still hugely dependent on spending from governments”.

A vaccine will only partially repair the economic damage wrought by coronavirus, and there will be deep corporate scarring.

“An effective vaccine would, for example, reduce the risks of long-haul travel and allow borders to open more,” says Lawson.

“But companies will also re-assess the value of their business travel, likely lowering its prevalence over the longer term.”

That, in turn, would weigh on the future of aviation and the business hotel sector.

Tech acceleration

Covid-19 has also led to an acceleration in digitalisation, permanently altering business models and consumer spending patterns.

“The vaccine is better thought of as a force removing some of the downside risks for beaten up firms and sectors and moderately improving longer-term growth prospects, not something that solves all of their challenges,” Lawson says.

PwC in November revised its projections for the UK economy, expecting activity to recover to pre-pandemic levels only in Q3 2022, and even then only under its ‘quick rebound’ scenario.

If recovery goes slowly, with further lockdowns, restrictions, and a ‘thin-deal’ with the EU, it could take until the end of 2023.

With the prospect of an earlier-than-expected mass roll-out of vaccines in sight, however, PwC expects all sectors to return to some kind of growth in 2021. Healthcare, hospitality and transport are forecast to lead the way, growing by between 21% to 48% under a ‘quick rebound’, and 4% to 13% under a ‘slow rebound’.

“Firms that will benefit most from the likely eventual quashing of the pandemic are those that have been beaten down the most in recent months,” agrees Lawson, as has already been seen in the boost in their share prices.

“It is,” he adds, “less clear this rotation will continue now expectations have been reset”. The road to recovery looks more bearable with the vaccine news, but it will still be strewn with corporate casualties.

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