Morgan Stanley
  • Thoughts on the Market
  • Feb 11, 2021

COVID-19: Variants, Vaccines and the Road Ahead

Andrew Sheets and Matthew Harrison


Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley.

Matthew Harrison: And I'm Matthew Harrison, Equity Research Analyst covering biotechnology.

Andrew Sheets: And today on the podcast, we'll be talking about new variants of COVID-19, the booster market and the road ahead for vaccinations. It's Thursday, February 11th, at 3:00 p.m. in London.

Matthew Harrison: And 10:00 a.m. here in New York.

Andrew Sheets: So, Matthew, I'm really glad we have a chance to speak today, because I feel that when you open up the newspaper or you read the news, there are these two very different narratives about what's going on with COVID-19 at the moment. On the one hand, there's a very worrying narrative that we're getting new variants. And the other story is much more optimistic. The vaccination is progressing quite rapidly, maybe somewhat better than expected in the U.S., and the U.K.. So as you step back and you look across kind of the wide variety of data that you look at regarding COVID-19, I think a good place to start is kind of where do you think the story is taking us?

Matthew Harrison: From my perspective, I probably fall more on the optimistic side. And let me give you a couple of points that probably put me there. So the first one is if I look at the efficiency of vaccine distribution in the U.S., we've moved from a situation where a month ago, only about 20% of shots that were distributed were getting into arms and now we're north of 70%. So the efficiency of the operation is improving. The second thing is the supply of vaccines in the US has pretty much been on target with what the manufacturers were estimating. So we haven't had supply issues. Clearly, demand is outstripping supply and that remains to be something that we can fix. But the efficiency of the operation is improving.

Matthew Harrison: And then the second item is variants are potentially concerning. The data that we have so far on vaccine efficacy against variance is such that while it may be slightly less for the most virulent of those variants, which is the South African one, it still prevents severe disease. It still prevents hospitalizations. And the vaccines are still working against those variants. So in general, the more vaccine we can distribute, the less risk we have of new emerging variants and the variants that are out there; we still have vaccines, which are effective at preventing severe disease and hospitalizations.

Andrew Sheets: The other thing that I think comes up a lot in this variant debate and vaccine efficacy, you know, is just you have a really wide variety of vaccines and vaccine technologies that seem to be out there and more are continually being deployed. What are some of the different technologies, some of which seem quite novel in terms of attacking this virus, and how much does that matter for the ability of these vaccines to address these mutations, address these new variants?

Matthew Harrison: So there are three main vaccine technologies that are being used right now. So one is mRNA or this messenger RNA technology, one is something called adenovirus, where you essentially put the genetic material that elicits the immune response in another virus and then you allow that virus to infect the people and create that immune response. And the third is something called a protein subunit where you use an adjuvant and the adjuvant is a technology that sort of propels your body to have a significant immune response.

Matthew Harrison: All three of those technologies have produced effective vaccines. What we have noticed, though, is that the efficacy is a little bit different. It appears that the protein subunit, as well as the mARN, have higher efficacy compared to the adenovirus vaccines. From the perspective, though, what you were asking was, let's just say that we do have a variant that needs a special booster for it. I think this goes back to the beginning where speed is one of the most important factors. And so mRNA vaccines are the probably the fastest in terms of speed to market because all they require is the genetic sequence. And then the second thing for that's very easy to do with mRNA vaccines is let's just say there was an issue with multiple variants that we needed to protect against. You could put those multiple variants in the same vaccine so you could stack many together. The technology could be upwards of 40. So it's very flexible and it's very quick in terms of being able to address those variants.

Andrew Sheets: And so as you think out over the next, say, three months. What do you think is kind of a realistic, optimistic case for what the world could look like in three months or six months? And what do you think is a realistic, pessimistic case for what could still lie in store?

Matthew Harrison: I'd like to answer that in two ways, Andrew. So the first one is, over the next three months, there's probably two pretty clear bands of what we could expect. The bear case is essentially that the South African variant quickly becomes the dominant global variant and that renders lower efficacy for vaccinations. More people will get mild and moderate disease even if vaccinated. And the spread of the disease will still be more than we would expect even with vaccinations, because you would have more people getting mild disease even if they were vaccinated. The sort of optimistic scenario is that we deliver more vaccines quickly and that stops these new strains from spreading quickly around the globe. We sort of get to a point by May where we were close to herd immunity. It's unlikely that some of these new variants are going to become dominant globally. And that puts us in a very strong position as we head into the fall of 2021.

Matthew Harrison: But I also want to leave you with sort of a longer term question mark, because I think this is also important, as you think about bull and bear cases. The longer term bear case is that even if the U.S. and say, the UK and Western Europe were able to vaccinate themselves relatively quickly during 2021, the concern is that there are, many emerging market countries who won't be able to vaccinate themselves until late into 2022. And so that means you're going to have another southern hemisphere winter and then another northern hemisphere winter where the virus can replicate. Lots of people can potentially get infected. And the risk that new variants emerge from those high spread winter seasons before those populations can be vaccinated are such that there may be a few variants that we do need to worry about that could more substantially evade vaccines. And that would be something then the US and other countries would have to quickly address. And so that's the longer term question mark that we have to pay attention to.

Matthew Harrison: I think people would probably be interested in your view in the bull and the bear case for the market over the next few months. And the key factor is your tracking, including how the vaccination rate and the variants may impact investors view of the market.

Andrew Sheets: Look, I think fundamentally and at the risk of kind of oversimplifying things, you know, what's better for addressing the virus is going to be what's better for addressing the economy, is going to be what's better for the market. And so I certainly think that scenarios where vaccinations go better, where new vaccine resistant variants do not become dominant. And I think those are the scenarios that are most consistent with our above consensus economic forecasts at Morgan Stanley and our relatively optimistic outlook for this year.

Andrew Sheets: I do think there is one kind of catch within this, however, that, you know, I think there's a temptation to think, gosh, I can't wait for the virus to be out of the market. And I think what that could potentially miss is that as long as the virus is raging, as long as the pandemic is serious, it really, I think, encourages a lot of different policy makers to really air on the side of caution when it comes to addressing the economy. Central banks provide easier monetary policy, governments provide more supportive government spending.

Andrew Sheets: And so there's certainly a scenario where if it's the summer or the fall and cases are much better, and the vaccination rollout is gone really well, and the view is that, look, the kind of the worst of the pandemic is behind us, we don't need to do as much to support the economy. That could be a little bit trickier for markets. And so I don't think we need to worry about that quite yet. But one way that I'm kind of thinking about the near term is that while the pandemic is still very serious, it can provide a good reason for these various policymakers to continue to be quite accommodative in how they're approaching markets, something that becomes more complicated, ironically, when hopefully the pandemic gets much better.

Andrew Sheets: I also think that, the market's still very confused about what the long term picture is. That there's a kind of a theory that the real rate of interest on government bonds, the yield over and above inflation, should be somewhat related to the productivity growth of the economy. And so if productivity growth is high, like it was expected to be in kind of '99/2000, you can get to kind of higher yields, and when productivity is expected to be quite low you're in a kind of a deep, long economic slump like Japan has been in over the last 20 years. Bond yields are much lower.

Andrew Sheets: And as you look at bond pricing at the moment, the bond market is still pricing as if this is going to be a long, drawn out, long lasting damage to the global economy, to the U.S. economy. And there's certainly scenarios where that's very possible. But there are also scenarios, as you alluded to, in kind of the bull case, where that's not the case. Where this is addressable and where the future is actually better. And I think in that way, this is a really unique crisis in the sense that it, you know. It wasn't possible to vaccinate against the subprime mortgage crisis. It wasn't possible to vaccinate against the European sovereign crisis. Those were functions of either kind of bad investments, bad risk management, or just the structure of the system. But what you've had with COVID-19 is an incredibly serious pandemic, a natural disaster effectively, but also one where in certain scenarios it can go away or be managed in a way that some of these other prior market challenges just simply could not be.

Andrew Sheets: Matthew, great talking with you.

Matthew Harrison: And you as well. Andrew, thank you.

Andrew Sheets: Thanks for listening. Subscribe to Thoughts the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.


We dive into what’s ahead amid competing news headlines on the improving pace of vaccinations and worries over new variants.

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