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Growth Signals


The key progress on the covid-19 vaccine front has presented financial markets with a clearer path for an economic recovery. This week, US biotech company Moderna joined Pfizer and BioNTech in announcing positive preliminary clinical trial results for its own clinical vaccine trial, and increased the possibility of having two emergency-approvals of covid-19 vaccines by end of 2020.

Similarly, Moderna’s results indicated a 94.5% efficacy in its clinical trials, and is expected to request approval by the US Food and Drug administration “in the coming weeks”. The economic implications of this health crises underscore the importance of progress on an effective covid-19 vaccine. With public vaccination boosting the outlook to the service industry and monetary and fiscal policy expected to continue to support the output gap, key growth signals are emerging.

Economic indicators, including the level of business and consumer confidence together with the fiscal and monetary policies in place, all have a fundamental role in shaping the phases of the economic cycle and the financial market outlook. However, the behaviour of financial assets themselves can also act as an indicator of future growth.

From the fixed income side, yields on safe-haven assets, such as the US Treasuries, shot up sharply on both announcements of positive vaccine developments. The US 10 Year treasury yield traded close to the 1% level on the news. Despite still trading at relatively low levels compared to history, the upward move in yields signals a shift away from safe investments and into riskier assets.

More importantly than the level of yields is the shape of the yield curve. The spread, which is the difference in yields between longer dated bonds and shorter dated bonds measures the shape of the curve, and in itself acts as an economic predictor. News on the efficacy of a potential vaccine, saw the spread between the yield on the US 10-year treasury and US 2year treasury widen, signalling a yield curve steepening. With loose fiscal and monetary policies already in place, the yield curve steepening acts as another signal that economic growth expectations have improved.

From the equity side, a bottom up-perspective also signals an improving trend. Earnings per share expectations have shifted higher over the past few days, particularly in Europe and across cyclically dependent sectors such as financials and energy. In this case, earnings expectations have increased by approximately 15% following the announcement of the covid-19 vaccine efficacy. Keeping in mind that bottom up analysis tends to be more pessimistic exiting a recession, the upward move in earnings expectations on a prospective vaccine highlights the significance of the discovery.

The sectorial rotation across equity markets also sends a pro cyclical signal. The improvement in economic growth prospects present an opportunity for a broader financial market recovery across risky assets, particularly growth sensitive sectors. This is captured in the relative outperformance of the financial and energy sector, up 20.4% and 23.5% respectively compared to a general equity market return of 16.9%, since the start of November.

While the outlook has turned positive, it is still not expected to be a straightforward recovery. Key short-term risks are still present, including the management of economic lockdowns, the result of the US elections senate majority and possibility of virus mutations. Nevertheless, while markets can oscillate their focus between any short-term weakness and long-term growth prospects, investors must remain disciplined to remember that the vaccine discovery serves as a key inflection point in this health and economic crisis.


This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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