The $10bn vaccine surprise, dangerous EV stocks, and value trap

The $10bn vaccine surprise, dangerous EV stocks, and value trap

6 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  In today's equity update we focus on the EU has announcement that it expects to spend $10bn on Covid-19 vaccines which will benefit companies such as Pfizer and BioNTech. We also put out a warning on EV stocks which have gone bonanza lately defying any logic and exposes investors to a potential violent correction when the speculative flow changes. Value stocks were the big thing when the Covid-19 vaccine was announced with rates going higher, but the entire trade has reversed again likely wrongfooting many investors. As long as the US 10-year yield stays below 1% we advise investors to hold the powder dry for the value stocks rotation. Finally, we take a look at global equities and valuation, and why we are positive on emerging markets.


It has been a quiet week with the market pausing after the positive response to the Covid-19 vaccine announcements. The two most interest stories in equities this week are Nvidia and Workday both indicating a slowdown in technology spending by enterprises as Covid-19 uncertainty is beginning to impact business decisions in this part economy. The other important story came today with news that EU could pay as much as $10bn for vaccines against Covid-19. Judging from analyst expectations we can see that BioNTech (BNTX:xnas), the partner with Pfizer, stands to benefit the most from the vaccine with revenue expected to increase to €5.3bn in 2021 up from €449mn in 2020 with expectations of free cash flow in 2021 of €3bn which is a high number relative to the current enterprise value of €18.3bn. But this high forward free cash flow yield reflects an unknown future past the Covid-19 vaccine for BioNTech. Because will there we a recurrent need for the vaccine or is so effective that Covid-19 will be completely eradicated.

Source: Bloomberg

There will be a day of reckoning in EV stocks

As we talked about in today’s podcast, electric vehicle stocks are gaining momentum again in what has been a sheer bonanza in the past couple of weeks. This part of the equity market is driven clearly by speculative behaviour and an overweight of retail investors that are not looking at valuations. To give an idea of the speculative nature look at a small EV company called ElectraMeccanica, which makes three-wheeled electric vehicles, which has seen its shares up by 286% in only three weeks. The company is worth $675mn and is not expected to reach more than $100mn in revenue until 2023. This is the type of discounting the market has not seen since the dot-com days and should be a clear warning signal to investors. There is a lot of speculation that the incoming Biden administration will increase the EV tax credits increasing the incentive for purchasing EVs. While we are bullish on the green transformation theme over the coming decade this part of the theme is clearly getting overvalued and we think investors should think about reducing positions in EV stocks as an ugly correction is overdue.

Source: Bloomberg

Value trap once again?

It should have been the big rotation when rates were rising following the Covid-19 vaccine, but as we said repeatedly on our podcast it could become a false breakout and so far our hesitance against value stocks has been right. Value stocks are right highly correlated to interest rates and thus value stocks are a play on economic growth and potentially higher inflation. It is not a bad trade for 2021, maybe second half, but investors must be patient. It is not certain that value stocks will outperform growth stocks by a lot just because rates go up. Growth stocks are still compounding earnings at a much higher level and thus even with modestly higher rates they could continue to outperform value stocks. We will not tactically be positive on value stocks until the 10-year yield is above 1%.

We are positive on equities in 2021

On a higher macro level, earnings expectations for next year are slowly coming higher and we remain constructive that equities will deliver a strong positive return in 2021. With the free cash flow yield at 5.9% in the MSCI World Index equities are attractively valued against bonds. The main risk to an equity rally next year is an economic slowdown, but we put that risk at a low probability as we believe governments and central banks will continue to provide stimulus, and especially China will ease financial conditions in the new year in a response to what seems to be too tight financial conditions which means that emerging market equities will likely do quite well 2021.

Source: Bloomberg

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.