Vaccines providing an injection of hope for institutional investors

While there’s still a period of uncertainty ahead, the deployment of coronavirus vaccines is already having a positive effect on markets, according to a webinar hosted by FTSE Russell on Wednesday.

In November, the global and U.S. equities markets saw double-digit returns following vaccine announcements by pharmaceutical firms Pfizer Inc., Moderna Inc. and AstraZeneca, said Philip Lawlor, managing director of global investment research at FTSE Russell.

“Despite the excitement surrounding vaccines, we’re still looking at a very bleak COVID winter. The second-wave impact on [gross domestic product] forecasts in both the fourth quarter of 2020 and the first quarter of 2021 is large. However, as we’re living through this downgrading process, vaccines are changing the focus to the potential upswings in the recovery later in 2021.”

Read: Vaccine news a shot in the arm for value investing

He said with labour markets and wage growth remaining weak into 2021, inflation levels will also likely remain low. “Central banks are going to remain very focused on the status of their respective labour markets, as they see wage growth to the key cost push inflation driver. Until we see employment levels pick up and wage growth return to pre-COVID levels, the central banks are unlikely to adopt a hawkish tone.”

In addition to vaccine availability, Lawlor said the incoming administration of U.S. president-elect Joe Biden in early 2021 will also create positive effects in the U.S. bond market, with the appointment of Janet Yellen as U.S. treasury secretary. “She creates a very dovish nexus between the Federal Reserve and the treasury. All of this is very supportive for risk appetite. On Jan. 20, we’re likely to have a better understanding of what’s going to happen in the first 100 days and we’re likely to see additional fiscal stimulus.”

In regards to U.S. 10-year bond yields, he said a rise to 1.5 per cent wouldn’t signal a major trend reversal nor tighten financial conditions. While the equity risk premium would decline slightly as a result, it would remain well above its 25-year average level of 2.5 per cent.

And with the U.S. dollar currently trading sideways, Lawlor said any recovery will have a direct impact on emerging markets in 2021. “The performance of these markets is directly related to U.S. dollar weakness, but the focus into 2021 is on the theme of reflation and that will determine growth in the rest of the world.”

Read: U.S. markets betting on Biden, investors preparing for energy sector impacts