Stock market turns on a dime, but vaccine boost could be premature

The Australian stock market turned on a dime on Tuesday as it slavishly followed the US market which had decided the end of the COVID threat was in sight. All it took was a set of promising results from one drug company.

The wave of optimism from the promising trial results from Pfizer hit tidal proportions on Monday in the US with the Dow up almost 3 per cent and carried over to a 2.2 per cent surge on the Australian market on Tuesday morning.

It felt like premature enthusiasm. And as the day progressed the party was still going but it got quieter.

Regardless of whether the initial burst of exuberance was a false dawn, it was the tonic needed to revive a series of cyclical stocks that had been decimated by the pandemic.

By afternoon trading the gains had already started to fade.
By afternoon trading the gains had already started to fade.Credit:Jim Rice

The renewed optimism gave the overall market a lift in Australia but, like the US, the monster boost was in stocks that were hardest and most directly hit by the pandemic. And the price spikes were further exaggerated by short sellers covering their positions.

Conversely, the group of stocks deemed COVID resistant or even pandemic-enhanced were dumped. Thus it was a rare moment of joy for long suffering value investors whose investment philosophy has been sorely tested by the pandemic.

The divergence between value and growth on Tuesday was polarising. The flip from stocks such as Afterpay to the previously under-loved value stocks like Qantas or retail property mall owner Vicinity was extreme.

It’s not the first time over the past six months that positive results from biotechnology stocks about possible vaccines have provided a fillip to shares in, for example, airlines. And this burst of optimism may also fizzle before there is any sustainable improvement.

But there are at least 10 potential vaccines in advanced stages of feasibility so the market’s punt that at least one will yield an appropriate outcome is reasonable if not a bit premature.

Whether it will be the latest candidate, Pfizer or AstraZeneca or even our own University of Queensland, is largely irrelevant. That said stockmarket optimism has been growing gradually for the past six months.

When the markets crashed in March very few stocks were initially spared. Since then Australia has witnessed the formation of bundles of stocks based on where they sit on the COVID curve.

If we are only six months away from an effective COVID vaccine the enthusiasm is understandable but probably a little overdone.

First there are the existentially threatened companies – the front line COVID casualties. These stocks, particularly those involved in travel and entertainment have remained depressed. But for emergency funding measures like securing new lines of credit from banks, equity raisings and government stimulus, they would not have survived.

If we are only six months away from an effective COVID vaccine the enthusiasm is understandable but probably a little overdone given it may take a long time before travel and leisure returns to pre-pandemic levels.

At the other extreme of the ASX performance tables sit the growth stocks that largely sit within the technology space. Broadly, many of these new world companies facilitate virtual social and commercial interaction. In Australia these are dominated by online retailers, digital payment players and virtual gaming companies, software manufacturers, etc.

While shares in these companies were trashed on Tuesday, their yearly performance has been staggering. Take Xero and Zip which are up about 50 per cent over the past 12 months, and Wisetech which is ahead 20 per cent. And then there is Afterpay whose yearly rise is off the vertical charts – up more than 240 per cent. On Tuesday these stocks wallowed in a puddle of red ink.

The only other group of stocks that come close to these performances is the gold companies whose outsized gains reflect the uncertain times created by the virus. They also took a beating on Tuesday.

Supermarkets operators, Coles and Woolworths, that have reported soaring sales during COVID also saw their share prices return to earth with a thump.

COVID losers have also included Australian banks which have performed poorly in response to fears about the risks of non-performing loans. CBA has been the best of the bunch, having fallen about 10 per cent over the year while Westpac shareholders have experienced a more diabolical decline of more than 32 per cent. For the banks, Tuesday’s gains ranged from 3.4 per cent for CBA to a staggering 8.2 per cent for NAB and were the biggest factor that pulled up the overall market.

Many bricks and mortar retailers were hit hard in the early days of the pandemic but recovered as consumers started opening their wallets in the middle of the year.

But the real estate trusts – the shopping centre landlords – were probably the standouts in the Australian market on Tuesday. Shares in Unibail Rodamco Westfield – the giant mall operator here and in the US – have fallen more than 60 per cent over the past year. But the 38 per cent improvement in its shares on Tuesday was the definition of extreme.

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