Here vaccine can change your portfolio

The upcoming vaccine trials, if successful will be a green signal for economic recovery and something that will change the dynamics on Dalal Street.

While the markets look to be pricing in a mass vaccination drive by early 2021 – The markets being a leading indicator will start reacting much before that.
The moment the FDA confirms a vaccine that should happen by November – you effectively step into a risk-on the environment. A risk-on environment is one which captures positive investor sentiments where investors do not mind investing capital into riskier assets.

The markets for the last few months have bounced back globally due to a mix of factors like all-time low bond yields, cheap and massive liquidity, and an expectation about a sharp V-shaped recovery. Wall Street has seen the Nasdaq make all-time highs and in many EMs the markets are pretty much back to pre COVID levels.

While the confirmation about a vaccine will be a green signal for life to be normal again, it will change the dynamics for asset allocation globally;
The vaccine will cause a selloff – The moment you step into a risk-on environment, there will be a significant selloff in the bond market and back into equities. Globally many institutions have been holding bonds with near-zero to negative yields for the safety aspect. This money will start coming back to equities.

It will cause a rotation of money within equity markets. – After the initial euphoria, the vaccine should trigger a sell-off in the equity markets too. The money will flow start to flow away from the expensive and blue-chip stocks to cyclical and value stocks
In the last few months, there has been a huge influx of liquidity-driven money that has parked into the premium blue-chip and tech stocks. Since most of these stocks are present in the index – it gives out a false impression that markets have done very well. In reality, this rally has been fueled by only a few concentrated names. There is a massive opportunity in the broader markets with many names available at inexpensive valuations.
The Gold rally will bust – The gold rally was fueled by three things essentially – a weak dollar, low real interest rates, and its use as a safe haven. The moment you step into a risk-on environment, real interest rates will rise and money will start flowing out as quickly as the inflows were.

The best approach in these times would be to start booking profits from select blue-chip names and start entering quality names that have inexpensive valuations in the broader market.

The vaccine might shake up the markets a bit, but it would probably begin what possibly would be a multi-year bull run.

By: Priyam