Delays to vaccine rollout could have limited impact on Australian markets

This piece was published on 22 April 2021.

Vaccines have dominated local headlines for most of the past couple of weeks. From a health perspective, recent setbacks in Australia’s inoculation program have not been ideal, but for investors, in our view there are a number of reasons why these developments are probably less significant than you might first think.

Vaccine prospects brought us here, policy will take us forward

On the day Australia’s vaccination program officially commenced¹, the S&P/ASX 200 stood almost 50% higher than the low it reached eleven months beforehand when a nationwide lockdown was coming into effect². The market is now approaching the record highs of early 2020 and we expect it will surpass that mark, regardless of the recent uncertainty around the vaccine rollout.

The course of this resurgence was initially influenced by Australia’s success in containing the virus, and then later by the improving prospects for a vaccine coupled with unprecedented, and global, fiscal and monetary support. The latter of which remains largely in place. With the vaccine now in hand, the question of ‘when?’ replaces that of ‘if’ and it is policy support, we believe, that will have the greatest influence on the future course of economic and investment performance.

As a relatively open economy, the policies of Australia’s major trading partners will be vital in sustaining our own recovery. The ability to contain the virus, and, most critically, the level of policy support (or lack thereof) will be a key determinant. For now, Chinese infrastructure spending and the resultant demand for iron ore, and the Australian economy’s relative concentration in the banking and mining sectors bodes well, in our opinion.

Vaccinating under 50s may not affect economic activity all that much

Australia’s containment of the virus has been successful by global standards, with every state and territory having successfully managed periodic outbreaks over the past six months. As a result, Australia stands a world leader in economic activity as judged by metrics such as credit card transaction volumes and mobility as at March 2021, as shown in the figure below.

In considering the importance of virus containment to investment performance, however, consider Europe’s recent experience of higher caseloads and difficulties in procuring the AstraZeneca vaccine. Regardless, European stock markets have been some of the strongest performers in recent months amid a backdrop of ultra-easy monetary policy and a favourable sector mix³. We cite this as an offshore example of the importance of monetary and fiscal policy.

It is also worth mentioning that the initial stages of the vaccination program⁴, targeted the most vulnerable in our society. This blunts the potential impact of the virus going forward and should feed into risk assessments around future levels of restriction on economic activity. While it is true that the point at which we reach ‘herd immunity’ is most likely delayed by setbacks to the vaccine rollout, an argument can be made that a difference of a few months in vaccinating the lower risk parts of the population is unlikely to factor too heavily into stock market performance so long as considerable fiscal and monetary support remains in place.

Major economies and export partners are in good shape

Notwithstanding the possibility of future virus outbreaks, the risks posed by new variants, or more severe delays to the global vaccination effort, according to the IMF, Australia’s major export partners are expected to record resoundingly positive GDP growth through 2021⁵. China recorded GDP growth of 2.3% through 2020 despite the pandemic, and regardless of current friction around trade barriers, is expected to remain a significant driver of Australia’s own economic recovery through 2021 and beyond⁶.

In the US, it remains to be seen whether inflationary pressures will prompt the Fed to perform an about-face and unwind some of the ultra-accommodative policy currently in place. Most likely, the robust US economic recovery continues apace, set to record GDP growth of 6.25% in 2021⁷.

There is the potential risk that protracted setbacks in the global vaccination effort leads to concrete economic outcomes. Countries reliant on the AstraZeneca vaccine which are unable to provide the level of policy support available to many advanced economies, are expected to suffer disproportionately from vaccine rollout delays. In this situation, a country’s internal economic activity is suppressed through protracted lockdowns, and delaying the full return to global travel, tourism and broader activity is pushed back, would further compound the problem. This is particularly the case for emerging economies⁸.

Overall though, Australian equity markets should fare relatively well throughout 2021 owing to the combination of global policy support and an ongoing cyclical recovery. Minor delays to the vaccine rollout timetable for under 50s domestically is unlikely to affect that outlook.

¹ https://www.health.gov.au/news/covid-19-vaccine-rollout-on-track-to-begin-22-february
^2,3 Bloomberg. As at 23 March 2020.
⁴ https://www.health.gov.au/sites/default/files/documents/2021/01/covid-19-vaccination-australia-s-covid-19-vaccine-national-roll-out-strategy.pdf
⁵ IMF Country Data: China, Japan, US and South Korea.
^{6, 7} Bloomberg
⁸ https://www.wsj.com/articles/faltering-covid-19-vaccine-drive-in-developing-world-risks-prolonging-pandemic-11613557801