Sell in May and go away?

Posted 7 May 2021

The traditional stock market adage of ‘sell in May and go away’ is back in vogue again this year, after the first four months of 2021 brought healthy returns to investors with equity exposure. Of course, historic return observations have rarely been good predictors of future returns, and this year has hardly followed the traditional pattern. May has made an encouraging start, with stock markets only briefly spooked by former US Fed Chair Janet Yellen’s prediction that yields would likely have to rise to prevent economic overheating. However, overheating fears might have cooled slightly today, after the announcement that the US labour market added just 266,000 jobs last month, compared to the 770,000 new jobs added in March. Some analysts were expecting the new jobs number to reach one million.

The somewhat downbeat announcement caused long bond yields to fall initially (which increases bond value), which caused equities to rise sharply. However, the concern that employment in the US is still shy of pre-pandemic levels could spark fresh worries that labour shortages are holding back the recovery. Nevertheless, the prospect of the inevitable price-push from the reopening morphing into outright inflation – spoiling  the party through rapidly rising bond yields – remains the predominant investor scare story. We cover rising inflation pressures, especially on food, in a separate article.

Aside from the British and French navies being deployed off the coast of Jersey, the UK media spent most of this week more occupied with local elections and what the results mean for the future of the United Kingdom. While we leave such conclusions to the political commentators, we look at the state of the UK economy, and gauge the view of capital markets on what future opportunities may present. We can only say so much at this point: The currency market, which has offered an incorruptible political critique since Brexit, is telling us that nothing has changed – yet.

Of more immediate relevance for the investment community has been the Biden administration’s backing of a World Trade Organisation proposal for a waiver of the rules protecting the intellectual property behind the COVID vaccines. That sent shares of American and European vaccine makers tumbling on Wednesday.

BioNTech US-traded depository receipts (the main traded share – the German equity is unlisted) dropped initially about 30%, US-based Moderna was off about 20%, but Pfizer Inc. shares fell only about 3%.

Moderna and BioNTech are new-ish research houses, rather than drug producers. They don’t have a big backlog of patents, so the treatment of intellectual property and patents is extremely important to them. Goldman Sachs viewed the proposals as non-material for Moderna, which had already stated it would not enforce COVID-19 vaccine-related patents during the pandemic and that its intellectual property was embedded in its immense manufacturing know-how, resources and personnel requirements. Even so, it took a big hit, as did BioNTech, which has less protection than Moderna.

Germany, home of BioNTech, felt compelled to oppose the proposed waiver, Spain is backing it (European Union (EU) leaders are meeting after we publish today). The US decision may feel highly specific to the pandemic, but the issue of who benefits, and how, from medical research is extremely important. The values of Tech and Pharma are intrinsically bound up in the ownership of knowledge and international patents, which exist over 20 years, and many on the left have suggested reform is needed. China was thought the most likely to create risk for companies because of its lax policing. Now it may be that the US has released the political genie from the bottle.

We suspect that a time-bound pragmatic solution for delivering the COVID vaccine to the less well-off parts of the world will be found, but that companies will in future be limited in the profits they can make from research breakthroughs that were part-funded by the public – AstraZeneca seemed to have understood that from the start.

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