Vaccination hiccups but global recovery on track
When the first vaccines were approved by the FDA in the US in November last year, we re-calibrated our strategy by increasing the exposure to equities. It was always our expectation that the global vaccine rollout would be logistically difficult and would take most of 2021 to complete, 7 months on this remains our position. Out of necessity, the countries most severely hit by the virus have led the way in their vaccine rollout efforts. The US, UK and much of Europe have fully vaccinated over half of their adult populations, which together with high levels of natural immunity from prior infection, means they have a good degree of community protection against severe illness and death. Consequently, these economies are now reopening with the UK for example celebrating “Freedom Day” on July 19th when all COVID restrictions will be removed.
The Australian experience has been completely different for several obvious reasons. Firstly, our geographic isolation and closed international border meant we have experienced very little infection compared to most other countries. This promoted a cautious “wait and see” approach on vaccines approvals and rollout. In addition, our vaccine strategy was heavily reliant on the Oxford-AstraZeneca vaccine which gave certainty of supply as it could be locally produced under licence by CSL in Melbourne.
Unfortunately, some rare but adverse blood clotting experiences has increased aversion to this vaccine by a large proportion of the population. With more Pfizer vaccine supply on the way from July onwards there should be an acceleration in our rollout program. This is welcome news given the recent outbreak in Sydney looks quite serious and the on-going lockdown will suppress economic activity in Australia’s largest city for several months. While the more infectious “delta strain” of the virus is producing new challenges, the good news is the protein-based mRNA vaccines such as Pfizer and Moderna can be readily adjusted for new variants so that an annual booster shot will ensure high levels of immunity can be maintained as the virus evolves.
Strategy and Outlook
The cornerstone of our investment strategy has been that the progressive rollout of COVID-19 vaccines will enable a progressive re-opening of the global economy which will in turn boost corporate earnings and share prices. The confluence of this and the maintenance of very low interest rates and easy liquidity conditions will remain the key market driver for some time to come. Early in July the RBA announced that they would gradually begin to taper their bond purchases from $5 billion to $4 billion a week. This is a normal policy response to a strengthening economy, which we would expect to continue for at least the next 12 months or so. It still appears however that the first increase in interest rates here will not be until early 2024 when inflation should reach the RBA’s target level, so monetary conditions will continue to support equity markets for the foreseeable future.