In Q4 of the 2020 calendar year, several vaccines from the global health care sector were announced. These announcements outlined their efficacies, treatment procedures and possible availability. These announcements were greeted with a high level of positive reactions from financial markets as well as outlook improvements by multinationals and global asset managers. After dealing with a global pandemic that saw the global economy contract by 3.5% as reported by the International Monetary Funds (IMF), the news of multiple vaccinations prompted zeal-like confidence in many that a level of pre-COVID normalcy may be possible in 2021. However, midway through Q1 of the 2021 calendar year, it has become apparent that a major component of the economic recovery equation is the distribution of these vaccines. This has posed a major headwind for the global recovery, especially when one considers the large disparity between developed and emerging economies. This week we explore the developments surrounding this key fundamental component to this equation.
Supply-Chain Infrastructure, Vaccine Requirements and Availability
Global supply chains were materially affected by the spread of COVID-19, with prominent linkages along the logistic infrastructure being disrupted due to the closure of borders. While there has been increased levels of movement of goods since ”The Great Lockdown” period between April and June 2020, the infrastructure capacity remains below previous levels. This is predominantly due to an increased number of precautions necessary to simply enter goods within a country. Now, with the large number of vaccines needed, there was a sudden “shock” to establish additional supply networks to distribute the vaccines that have become available from the pharmaceutical industry. This added to an already weakened supply chain network as there is now a need for the distribution of these vaccines to approximately 8 billion people globally.
Now due to globalization, pharmaceutical industries outsource production which, within the current environment, have negative side-effects such as an inability to meet demand due to the exporting/production country’s COVID-19 curtailment measures. This occurrence remains in place even as vaccine creation is underway. Also, the requirements for the vaccines to be effective pose an additional hurdle for the logistic infrastructure. Specifically, this mainly applies to the Pfizer vaccine which requires very low temperatures during transportation and storage. This vaccine needs ultra-cold temperatures between -112F and -76F (-80C and -60C) and after thawing is good only for up to 5 days in a refrigerator. These requirements essentially require additional investments to transport these vaccines such as “freezer farms”, cryogenic containers for shipping and storage (which often uses liquid nitrogen for cooling) as well as a reliable and significant power supply to keep things cold. Without resolving these impediments, the distribution of the much-needed vaccines may be delayed.
Finally, availability is the next major impediment. For example, AstraZeneca stated that lower than the expected output at a manufacturing site in its European supply chain has impacted its supply level. This can happen because vaccines are complex biological products: the production process does not always yield the same amount of usable vaccine. Stringent quality checks are also in place to ensure that all batches are safe. If the quality is not right, less vaccine becomes available. This in effect creates a pretty large obstacle as it relates to mass-producing a vaccine if only a percentage are deemed viable and effective for distribution.
Implications for Global Recovery
These roadblocks were expected when the announcements of vaccines were made but the optimism may have prompted individuals to overlook these issues. The non-compliance of COVID-19 prevention measures has been recognized as global cases continue to rise, with new variants of COVID-19 with higher transmission rates aiding this issue. The 5.5% GDP output expectation indicated by the IMF will be challenged by the aforementioned as economic activity that does not include normalcy in consumption by individuals weighs on growth. While fiscal policy has provided the necessary buffer to shore up consumption during this period, it is not a permanent solution. Fiscal deficits will remain significant as the global monetary policy remains accommodative to support economies, but again debt sustainability matters with regards to long-term economic growth.
Notwithstanding, the global capital markets have begun to price in a recovery in 2021 spurred by vaccines and policy intervention. This is observed as value and cyclical stocks have again become attractive to investors and have begun to see share price appreciation. Yield curves have begun to show levels of steepening which historically is an indicator for economic growth through overheating (higher inflation). The defensive stocks such as the technology sector continue to hold relevance especially in the “New Normal” of a digitized society. Until the economy can operate at maximum capacity, remaining invested in companies with high solvency, strong management, quality earnings, diversified revenue streams, and good corporate governance both globally and domestically is important.
Written by Haughton Richards, FRM, FMVA, Senior Investment Strategist
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