News of a potential Covid-19 vaccine has stirred financial markets. While there remains some distance between a workable vaccine and life as normal, it has at least ignited hope that normal might be possible at some point. What does this mean for financial markets?

The most notable response to the news of a vaccine to date is a rotation from growth to value. Sectors such as banks and travel did well, while the apparently unassailable technology stocks seemed to show some signs of weakness.

This is a rational reaction. If we are drawing to the end of lockdowns and the resulting damage to the economy, it is possible that beaten-up cyclical sectors now look undervalued. With plenty of stimulus in the system, there is also the prospect of higher inflation (and ultimately, higher interest rates).

Equally, a higher risk-free rate would mean that future cash flows have less value. This would dent the relentless march of the tech stocks and favour ‘value’ areas – banks, energy, travel. In the early market response to the vaccine, these areas have done well.

However, the market reaction may be overblown: the assumption that life will go back to normal even if there is a vaccine seems optimistic at best. First, it needs to be approved and distributed, but at the same time, even if all restrictions were lifted, it seems unlikely that we will go back to life as before.

The obvious change is likely to be in our working lives: daily commuting and nine to five office work seems unlikely to hold the same allure now employees have seen an alternative. That means demand for offices is likely to fall, along with all the supporting infrastructure. High street retail and business travel are unlikely to return to normal. This means unemployment could stay relatively high.

Equally, higher inflation isn’t a given. Should the pandemic improve, governments around the world may withdraw stimulus, which would reduce inflationary pressures. Most do not have unlimited resources.

As such, it’s not a case of everything that has gone down will go up. There are companies, even whole sectors, that may not survive. Investors need to distinguish between companies with a future and those without. The vaccine may save some sectors, but not all.

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This article was sourced from Adviser-Hub.co.uk.