Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

This week certainly had an “out with the old, in with the new” feel about it. After a dismal end to October – a month often associated with volatile stock markets – two pieces of encouraging news in quick succession sparked an impressive rebound for shares.

First, fading fears of a viable challenge to America’s presidential election result took second place to a new optimism about Joe Biden’s victory. Even with results in Georgia and North Carolina still to be called, markets appeared content the electorate had given a clear mandate to Biden to govern. The dissipation of uncertainty appeared to outweigh – temporarily, at least – the probability of a gridlocked government owing to Republicans staying in control of the Senate.

Then came news from Pfizer that the potential Covid-19 vaccine it has developed with BioNTech of Germany has proven effective in 90% of cases in phase three trials.

This highly welcome news is positive not just in itself, but also because it raises the possibility other Covid-19 candidate vaccines may be nearing the late stages of development. The Pfizer vaccine is understood to share a similar technology to other frontrunners, differing from conventional vaccines in that it targets a specific protein on the surface of the SARS-CoV-2 virus1.

The stock market rally was far from uniform. Stocks sensitive to changes in economic growth expectations – many of which have borne the brunt of this year’s shutdowns – bounced back very rapidly. Big risers included airlines, oil producers and banks, along with retailers like Marks & Spencer and WH Smith2.

Banks benefitted from a rise in longer dated government bond yields, consistent with an outlook of stronger economic growth and inflation3. A widening gap between low interest rates and bond yields helps to improve the profitability of banks, which borrow on a short term basis and lend over the longer term.  

Conversely, “stay at home” stocks such as Domino’s Pizza and Ocado languished or moved into reverse, and even Dettol maker Reckitt Benckiser found itself temporarily on the back foot. Similar patterns unfolded in the US, with former investor favourites like Peloton and Zoom on the slide4.

The strong participation of UK shares in this latest rally will come as a relief to investors who have been forced to watch the UK market recovering more slowly than its global peers since March.

However, the palpable euphoria of the past few days is worth viewing not only in the context of an extended period of market weakness through the summer months but also because a workable vaccine has the potential to save and change lives. Understandably, the turnaround in investor sentiment has been stark.

The first thing to say though is, as it stands, we are still quite a long way from having an immunised population. One of the things that remains unclear about the BioNTech-Pfizer vaccine is whether it eliminates infections or rather it just combats symptoms.

While neutralising symptoms would be extremely useful indeed, the elimination of infections and, so, the spread of the disease, would also be required to return the world to “normal”. This means we cannot be sure the fundamental outlook for companies like airlines, hospitality and commercial property firms over, say, the next three to six months, has changed for the better quite yet.

Second, it’s not yet clear which parts of our lives will eventually return to normal in a post-pandemic world and which will remain the same. Has the coronavirus fast-forwarded us to a world of home deliveries, working from home, online meetings and video gaming we were headed for anyway, or will the shortcomings inherent in this way of living eventually cause people to reject the new normal?

The answers to these and many other questions have yet to be decided, suggesting the outlook for shares from here will remain complex and not divided by a clear line between traditional and online businesses.

Even after this week’s extraordinary gains, many economically sensitive stocks remain well below pre-pandemic levels. It’s perhaps right they do too, given the economy still faces several challenging months, during which businesses will remain under immense pressure from the threat or actuality of lockdowns and as unemployment continues to rise.

Even so, what this week gave us a glimpse of is the potential for shares in severely depressed companies to rebound quickly in the event of better-than-expected news. The prospect we shall see further, positive developments for other candidate vaccines before the end of the year suggests the current rally may have further to run.  

In volatile times such as these, it makes sense to maintain a diversified portfolio of investments. Funds focused on out-of-favour, value-oriented areas of the market could make a useful addition to a portfolio already exposed to growth stocks, especially if economic growth expectations continue to improve.

Special situations funds and UK equity income funds using a contrarian, value-based approach may have a lot to gain in a post-Covid world. The Fidelity Special Situations Fund, for example, focuses on businesses undergoing positive change yet to be recognised by the wider market. Legal & General and Serco are among its largest investments currently.

As a counterpoint to that, the Fidelity UK Select Fund favours businesses with strong brands and robust balance sheets – “quality growth” companies, in other words. Particular attention is paid to the competitive environment in which companies operate and the potential for disruption through the arrival of new technologies or businesses. Unilever, Reckitt Benckiser and Ferguson are among the fund’s largest investments.

Source:

1 STAT, 09.11.20
2,4 Bloomberg, 12.11.20
3 US Department of the Treasury, 12.11.20

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The Fidelity Special Situations Fund and Fidelity UK Select Fund can invest in overseas markets, so the value of investments can be affected by changes in currency exchange rates. The funds use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Currency hedging is used to substantially reduce the effect of currency exchange rate fluctuations on undesired currency exposures. There can be no assurance that the currency hedging employed will be successful.  Hedging also has the effect of limiting the potential for currency gains to be made. The Fidelity UK Select Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered:

Volatility; Active investing; UK; Global

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