The COVID-19 vaccine candidate by Pfizer and BioNTech has shown promising results in first interim analysis, giving a big boost to economic and corporate earnings outlook. We believe a sector rotation from growth to value is likely, and this rotation would last longer than previous ones. Buy beaten-down “reopening” sectors selectively, and reflationary plays.
- Huge boost for cyclical stocks. While news of good progress in vaccine development is positive for the stock market in general, we expect cyclical / old-economy stocks which are most sensitive to economic cycles to enjoy the biggest rally. New-economy stocks, having significantly outperformed since the outbreak, and with valuation premium over old-economy stocks at decades-high, may face profit-taking.
- Sector rotation could last for longer this time. Value stocks did outperform for several times this year during sector rotations, but each one did not last long, due to a lack in fundamental changes and resurgences in COVID-19 cases. This time can be different, thanks to the encouraging progress in vaccine development and therefore better outlook in recovery of the economy and corporate earnings.
- Growth stocks turning weak, value stocks improving. In HK market, Relative Rotational Graph (RRG) shows that growth sectors such as Healthcare, Consumer Staples and IT have turned or are turning weak. On the contrary, beaten-down cyclical sectors are still “lagging” but starting to improve, with Financials moving to “improving” zone first.
- Sectors to play on this potential sector rotation: 1) Buy beaten-down “reopening” sectors selectively, including HK/China apparels, wine & beer, restaurants, online travel agencies, shopping mall landlords; 2) Buy reflationary plays as inflation expectations are rising along with economic outlook. Banks and Insurers should benefit from moderately higher inflations, bond yields and interest rates. Inflation expectations are also being boosted by Joe Biden’s promised fiscal stimuli such as infrastructure spending.
- Remain positive on Internet giants over medium-to-long term, despite short-term profit-taking. “Stay-at-home” stocks (mobile games, e-commerce, online education, online clinic, SAAS) will be under pressure if the pandemic has an end in sight. That said, Internet sector will continue to benefit from structural changes post-COVID, and companies have accumulated much more users during the pandemic period.
