19 May - update from our investment partner

  • 19th May 2020

What has happened

Markets saw a strong surge yesterday as Moderna’s early stage trail success boosted sentiment. Risk sentiment was also buoyed by tentative signs of European solidarity as France and Germany commit to an EU Recovery Fund.

Moderna’s beacon of hope

Given how well the market took the news that Remdesevir may help against the symptoms of COVID-19, movements towards a vaccine were likely to lead to substantial gains. Not only is this a positive for the specific vaccine that Moderna is working on but also suggests that COVID-19 will be a virus that can be vaccinated against. Given many of the major viruses in the world today cannot currently be vaccinated for this was a constant worry for policymakers. Moderna’s progress helps to reduce one of the big market risks, that waves of COVID-19 would periodically shut down parts of the global economy. Markets will be watching progress towards a vaccine, and timelines for eventual manufacture, extremely closely to see if the Sword of Damocles is removed from the global economy.

EU Solidarity?

There was also encouraging news from Europe with solidarity from France and Germany in support of a €500bn recovery fund which would issue grants to the hardest hit European countries. Grants are importantly not loans as they do not need to be repaid and therefore are an important step towards fiscal burden sharing for the coronavirus crisis. Ahead of the last EU council Angela Merkel did say that she in principle supported the idea of an EU recovery fund so arguably there is little new news in the joint press conference. That said, it will put additional pressure on the fiscally conservative Northern bloc to consider a fund, or at least engage in the debate on the ratio between grants and loans in the final package.

What does Brooks Macdonald think

The market’s base case was a gradual easing of lockdowns, maybe a small increase in infections that can be contained, then a return to relative normality. We felt some caution about this, conscious of the risk of a more substantial second wave but also how ‘normal’ the world would look for the hospitality and travel sectors if the virus was still lurking around. Signs of progress towards a vaccine de-risks some of these concerns as, if successful, a vaccine could effectively halt the virus risks in its entirety. Understandably markets have taken this very well and we have seen some travel and hospitality equities enjoy outsized gains.

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