Weekly Investment Update (11/20/2020)
Adjusting Positioning at the Margin to Account for a Brighter Long-Term Outlook
With Europe’s COVID-19 daily case count leading that of the U.S. since the beginning of October, we remain focused upon the speed at which curves will flatten as a result of recently reintroduced lockdowns. For example, while hospitalizations in France now exceeds the peak seen in April, the number of new daily cases has begun to taper off following a nationwide lockdown. European new daily case data should provide a more timely indication of when we could expect to pass what will likely be a long-term peak in global cases.
In addition to following the European case curve, U.S. high-frequency activity data remains a crucial barometer for equity market sentiment given the increasing number of recently implemented restrictions across a number of states. Nonetheless, the juxtaposition of impressive vaccine results against a backdrop of increasing mobility restrictions has led equity markets to look through what is likely to be a near-term dip in growth. With U.S. equity indices sitting near all-time highs, future highs are likely to be attained through a broadening of sector participation, which would be a healthy development.
In anticipation of and following positive news from multiple Phase 3 vaccine trials over the past two weeks, Bessemer equity portfolio managers have adjusted positioning at the margin. Adjustments were made in order to account for a rebound in some of the higher-quality businesses that were most negatively impacted by COVID-19. For example, positions were increased in a top U.S. food distributor, global financial service providers, and a leading U.S. off-price retail apparel and home accessory business. In order to fund these additions, reductions were made across businesses that had benefitted from the pandemic environment, namely companies with extended valuations in the technology and consumer discretionary sectors.
New Virus Wave Starting to Weigh Modestly on Spending, Though Continued E-Commerce Strength May Help Offset the Virus Impact
In analyzing credit card data, spending in the top-100 virus hotspot counties is modestly below the remainder of the United States. Unsurprisingly, the impact on spending has been most noticeable for brick and mortar stores, which are now down nearly -8% relative to last year in the top hotspots, compared to down -1.0% in the rest of the country.
However, online spending rates remain comparable in hotspot and non-hotspot counties. Throughout the pandemic, online spending as a percentage of sales has increased from low-teens to approximately 20% and remained at consistently higher levels over the past several months. These e-commerce trends point to a potential fundamental shift in consumer behavior; elevated levels of e-commerce activity remained in place even after many shelter-in-place and social distancing measures were eased.
As consumers have shown an incredible ability to adapt their spending habits in the current environment, the resulting reallocation of spending methods could help mitigate the negative economic impact of increased virus cases on consumer spending activity.
A Second Week of Positive News on Vaccines Gives a Boost to Depressed Sectors
The most material announcements focused on the vaccines created by Moderna and Pfizer and BioNTech. In the first interim analysis of Moderna’s Phase 3 vaccine candidate, the efficacy rate was found to be very high at 94.5% based on 95 cases of COVID-19 starting at two weeks following the second vaccine dose. Amongst these individuals, 90 received the placebo and five received the vaccine; none of those who received the vaccine and contracted COVID-19 had severe cases. No significant safety concerns were found. This trial includes participants most at risk for severe disease including older adults as do all the ongoing large late-stage clinical trials. Moderna plans to have 20 million doses available to the U.S. by year end, pending approval by the FDA; the U.S. has ordered 100 million doses and has the option to purchase an additional 400 million. Lonza Group makes a key ingredient used in this vaccine; the company plans to begin European production by the end of the month.
Additionally, Pfizer and BioNTech announced the final efficacy analysis on its ongoing Phase 3 trial. The vaccine was found to have an efficacy rate of 95% in participants based upon data collected seven days after the second dose and on 170 cases of COVID-19. Among the COVID-19 positive individuals, 162 received the placebo and eight received the vaccine; one of the 10 severe cases of COVID-19 was found in the vaccinated group. Additionally, it was found that the efficacy rate among adults ages 65 and over was 94%. No adverse events were reported.
The companies now have enough safety and efficacy data to apply for Emergency Use Authorization (EUA) from the FDA. In fact, Pfizer applied for its EUA on Friday afternoon. The FDA is expected to meet with its vaccine advisory committee on December 8 to 10 and to make a decision by mid to late December; European regulators are expected to make a decision on their emergency application around the same time. The companies expect to produce up to 50 million doses in 2020 and up to 3.1 billion by the end of 2021. The U.S. has a contract to receive 100 million doses with the option for 500 million more. It is expected that part of this order will be received in 2020.
Also this week, Moderna reported that its vaccine remains stable at 2 to 8 degrees Celsius, which is the standard temperature of home and medical refrigerators, for 30 days, up materially from the original estimate of seven days. The vaccine is otherwise stored at -20 degrees Celsius for up to six months. This is in contrast to Pfizer and BioNTech’s vaccine that can only survive at 2 to 8 degrees Celsius for up to five days and must be stored at -70 degrees Celsius. Pfizer plans to deliver its vaccine in dry ice boxes for this reason. Likely in response to potential distribution difficulties on Pfizer’s end, the company announced the U.S. COVID-19 Immunization Pilot Program on Monday. Four states (Rhode Island, Texas, New Mexico, and Tennessee) will be home to the program that aims to help refine the delivery and deployment of the vaccine. Pfizer noted that these states will not receive the vaccine doses sooner than others.
In other news this week, AstraZeneca and University of Oxford’s Phase 2 trial study was published and shows that its vaccine candidate produced a robust immune response and with fewer side effects in the older age group being examined. These companies plan to have an interim analysis of its Phase 3 trial announced by year end. Johnson & Johnson also announced this week that it is on track to have efficacy data on its Phase 3 clinical trial of its single-dose vaccine candidate available in early 2021. The U.S. has very large contracts for both of these vaccine candidates pending approval.
Looking forward, we expect the U.S. government to issue more guidance on how, where, and who will receive the vaccine given that a limited supply is expected initially. Our best estimate is that enough vaccines will be available to reach herd immunity as soon as summer 2021, assuming that multiple vaccines are approved by the FDA and the rollouts are relatively smooth. That said, we may see a material improvement in the outlook sooner since we expect health care workers, those at high risk for severe disease, and those who live in and work at long-term care facilities receive access to the vaccine first.
— Bessemer Investment Team
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