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Blink and You Might Miss the Vaccine Trade

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If the window for the “vaccine trade” has already passed, it wouldn’t be out of kilter with recent stock-market history.

Euphoria surrounding
Pfizer’s
experimental coronavirus vaccine triggered big shifts within financial markets this week. The mere hope of an end to the pandemic coming into sight changes everything: Suddenly, the digital economy no longer looks like the only game in town, which is a reason to sell technology—the undisputed winner of 2020—and invest in travel. The wave lifted most “value” stocks, which mostly belong to old-economy industries and trade at deeply discounted valuations.

The trend already started faltering three days in. On Wednesday, airlines, banks, energy producers and industrial firms gave up some gains, while tech shares rallied.

Still, on a weekly basis, “value” is on track to outperform the broader equity market by the most in more than 20 years. Stocks shunned just a few days ago are leading the way: Shares in troubled British jet-engine maker
Rolls-Royce,
for example, are up 40%.

The question for investors isn’t if this reversal will end, but when.

Value stocks are suffering from structural headwinds that limit their upside, namely ultralow interest rates, strict banking regulation and the lack of the kinds of return on equity that the tech sector has unleashed through scale and network economies. Since 2009, the MSCI USA Value index has returned 246%, compared with 661% for the MSCI USA Growth index. Arguably, to bet against this trend is to fight the most powerful financial forces of the past decade.

Of course, there are still periods in which value stocks catch up, as markets realize that the discounts are exaggerated. The problem is that these periods have become increasingly short and hard to catch.

Historically, monthly value outperformance was spread out, with the average streak being around two months. Even before Covid-19, it had fallen to just one. This year, there was a “dash for trash” for a few weeks in May, but not a single month has so far ended positively for value.

A further rotation into value shares is almost certain to happen at some point. Even after this week’s bounce they are close to an all-time discount versus the rest, relative to earnings. Periods of fast and accelerating economic growth are associated with value outperformance, particularly after contractions, according to research by
Goldman Sachs.
Strong third-quarter data suggests that growth will jump-start as soon as the second wave of lockdowns and restrictions is eased. This time, the economic recovery may be seen as more durable.

Pfizer and BioNTech this week released promising, but preliminary, results for the effectiveness of their Covid-19 vaccine.

Pfizer and BioNTech this week released promising, but preliminary, results for the effectiveness of their Covid-19 vaccine.

Photo: biontech se/EPA/Shutterstock

Also, markets will probably get more catalysts like this week’s Pfizer news. While vaccines require approval and inoculating millions is logistically complex, solutions will eventually emerge. As the unknowns surrounding the Covid-19 crisis get cleared up, part of the premium placed on tech stocks will unwind.

Just knowing that something will happen at some point in the future, however, isn’t much of an aid to making decisions. Betting on value too far ahead of time could mean giving up on growth-led gains that far outweigh any later rewards. Rather than wholeheartedly embracing the vaccine trade, investors might be better off limiting themselves to identifying the few growth stories present in discounted sectors.

Broad value investing has become akin to jumping off a bridge onto a moving train: Even if the train is certain to pass, ultraprecise timing is essential. It is better left to a few daredevils.

Related Video

Health experts say having a vaccine is just one front in a two-front battle against Covid-19. The other is effective treatments for those who are already sick with the disease. WSJ breaks down the three most promising types in development. Photo Illustration: Jacob Reynolds/WSJ.

Write to Jon Sindreu at jon.sindreu@wsj.com

A Global Asset Management Seoul Korea Magazine

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