Vaccine provides welcome boost for value

Last week’s news that the Pfizer/BioNTech vaccine is effective at preventing Covid-19 was a huge boost for everyone, including the stock market. But not all parts of the market responded in the same way. Specifically, the news triggered a swift rotation from growth to value, as the table below shows.

While the update on the vaccine is clearly great news, the sharp share price moves were really a reflection of just how polarised markets have become.

A range of “work from home” stocks, whose shares have directly benefited from the pandemic over the last six months or so, saw prices lurch downwards. By contrast, a host of hitherto downtrodden and unloved businesses were leading markets upwards.

In our view, the main lesson to take from all this is not the identities of the risers and fallers, but that when good news is priced into a stock, any bad news can have a disproportionately negative effect. Similarly, when you have bought a business on a cheap valuation, a little good news can go a very long way.

The rotation reminds us that just as stocks that are “priced for perfection” eventually disappoint, so cheap stocks – those trading at a discount to their underlying intrinsic value - are unlikely to stay cheap forever.

Even after last week’s bounce, 2020 has still been a dismal year for value, as the chart below shows.

Value stocks continue to trade close to all-time lows compared to growth stocks and far below their long-run average, as the chart below shows. We do not profess to know if the tide has turned but we do think there is a huge opportunity for mean reversion. Investors who have all their eggs in the growth basket could find they miss out, as and when that reversion comes.