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Shift to value stocks on vaccine news may be short lived

Pfizer's progress in the fight against Covid-19 is great news but investors should reserve some caution
Shift to value stocks on vaccine news may be short lived
  • Rally in value stocks partly due to covering short positions
  • Central bank money printing has long term implications for currencies
  • Companies this week include: Games Workshop, Oxford Instruments and JD Wetherspoon

It has been an eventful week. The outcome of the US election is known but its implications for investors and stock markets has been swept aside by the announcement on Monday that Pfizer has a Covid-19 vaccine that is 90 per cent effective.

The stock market liked this news but it was much better for some shares than others. Tech stocks and those that were seen to benefit from a stay at home economy sold off whilst shares in sectors that have been battered went through the roof.

Some of this will be relief that there may be light at the end of the tunnel but this was undoubtedly geared by short sellers hastily covering their positions and buying back shares.

A vaccine is positive news but I am cautious at the moment. No-one really knows if it is safe yet and plenty of people won’t take the vaccine out of fear. No-one also knows whether the vaccine will protect against what the virus may look like in the future.

There is also the inconvenient truth that vaccinating millions of people will take a long time. Matt Hancock, the Health Secretary told parliament that the government hoped to vaccinate one million people per week. It’s going to take a lot of time to get vulnerable people safe if the vaccine works.

The news also reignited the debate on the valuation of quality growth stocks. People pointed to the spike in US Treasury yields and said that this would reduce the value of growth stocks where most of their value is based on future growth rather than current profits. This is true but I don’t see a yield of 0.9 per cent as troublesome. If we get back to the 3.2 per cent of two years ago then that would be a different matter.

I do not subscribe to the view that the central banks can keep a lid on interest rates forever. By printing money to mop up ever increasing government borrowing there remains the risk that they will seriously damage the issuing currency. They would then have to raise interest rates to defend the currency and asset prices would not like that.

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