Market Goes Back To Work


Market Scorecard

It was a massive day for the US market yesterday! Before this Covid-19 crisis, we would be talking about a 7% market move for weeks. Now though with the market volatility, we have seen a few moves already more significant than 7%. Asian markets are on track for their second green day in a row for the first time in two weeks.

Looking at the JSE All-share, it is up over 25% since our market lows on the 19 March. Can we say we have gone through the point of peak market fear? Time will tell. As Paul has noted over the last month, the market tends to bottom and turn when people are not expecting it. Society still has a long road to travel, but the market and society are different things. The market is forward looking, and at the moment it is taking the position that the spread of the virus is mostly under control.

Yesterday the JSE All-share closed up 3.68%, the S&P 500 closed up 7.03%, and the Nasdaq closed up 7.33%.

Our 10c Worth


One thing, from Paul

What about buying pharmaceutical stocks at a time like this? In the middle of a global pandemic of such major proportions, big money is being thrown at Covid-19 diagnostics, treatment, vaccines and immunity enhancers.

Research-based pharmaceutical companies might do well, depending on what they already have in the pipeline that might be useful to treat people with Covid-19. For example Gilead Sciences and its antiviral drug Remdesivir, which was originally designed to tackle Ebola by inhibiting an enzyme called RNA polymerase which is used by many viruses to replicate. In subsequent lab studies Remdesivir was also found to kill SARS and MERS, two earlier coronavirus outbreaks. Gilead is ramping up production in advance of full approval by the Food and Drug Administration (FDA).

There are at least 23 other Covid-19 treatments in development, and quite a few of them are drugs already approved for other conditions. That’s an advantage, because they are already known to have limited or manageable side-effects, but they still need to be FDA approved for use here. Here’s an example. Some patients infected with the novel coronavirus can develop uncontrolled immune response, leading to potentially life-threatening damage to lung tissue. As a result, tests are underway to explore whether drugs for rheumatoid arthritis, which inhibit immune responses, may be of use in the lungs. Amgen (another Vestact recommended holding) is a major player in this area, with one of the top selling drugs, Enbrel.

Johnson & Johnson (a Vestact recommended stock) has a very wide range of products in its pharma portfolio. Last week the company announced a new partnership with an arm of the US Department of Health and Human Services to continue development on a vaccine to prevent Covid-19. A team of researchers began development of possible vaccines in January, after coronavirus’s genetic sequencing became available. The research was conducted in collaboration with a team at the Beth Israel Deaconess Medical Centre at Harvard University, and eventually yielded one lead candidate with a promising immune response and two backup candidates. They plan to spend $1 billion to expedite testing and manufacturing of the drug.

Following an ‘accelerated” timeline, they anticipate the vaccine could begin Phase 1 clinical trials as early as September of this year. If those trials are successful, that time frame could allow an emergency deployment of the vaccine as early as January 2021 – a stunning turnaround for a vaccine. Johnson & Johnson is already beginning to ramp up production of the candidate vaccine with a stated goal of producing more than a billion doses.

Note that Johnson & Johnson is definitely not the only company working on a Covid-19 vaccine, there are at least 41 drugs in various stages of development. The other most advanced candidate is code named mRNA-1273 and is being developed by Nasdaq listed Moderna. It’s a synthetic mRNA strand that elicits an immune response and produces antibodies against the SARS-CoV-2 which results in Covid-19.

One word of caution. Making and selling vaccines is not generally a very profitable business. Vaccines often require updating, because the damned viruses are always mutating and evolving, so they have a high research and development requirement. The margins on the vaccine sales are also not great, because they have to be cheap to be used widely. Having said that, the prestige accorded to the company that produces the cure will be significant.

Finally, Amgen is also working on Covid-19 antibody strategies, in a joint venture with Adaptive Biotech. They aim to assess the antibodies in the blood of recovered patients, and work out which ones combat the disease and how they can be replicated in those who are not yet infected. This approach could well be faster than the vaccine route.


Byron’s Beats

The silver lining to the COVID-19 virus in SA is our government’s reaction to rally behind business. Ironically, they are doing things which they should have done ages ago.

Even spectrum is being released. See how quick and easy that is? Why they didn’t do it earlier, who knows. The telecoms companies are more than happy to pay big bucks for it. Yet our cash strapped government held it, unused.

The spectrum being released to support the economy will be available for free until November. It also includes chunks of spectrum suitable for a 5G rollout. I am hoping that pulling it back will be sticky once the agreement expires. The mobile operators should offer decent money to carry on using it after that date. The government gets funds and the SA consumer gets better quality data services. It is a win win.


Michael’s Musings

Yesterday the Rand was trading around $/R 19.30, much weaker than the $/R 14.00 level on 1 January. Below is a 5 year chart of how our currency has performed against the US Dollar. You can see the spike at the end of 2015 from Nene-Gate, there is the rapid strengthening in early 2018 due to Ramaphoria, the weakening at the end of 2018 due to fears of a China slowdown and now the spike from Covid-19.

One reason for the Rand weakness is due to money flowing from risky emerging markets into safe haven currencies. Another reason is our debt downgrade.

The silver lining to the weak Rand is that parts of our local market will benefit. Any exporting company will suddenly make much more money, and become more price competitive globally. A weak Rand also helps the part of our economy which competes against imported products. When global tourism picks up again, travelling to South Africa will be 35% cheaper than last year.

Of course, the import sector will be hard hit. Below is a graph from Trading Economics, showing our imports. As you can see, oil is by far our biggest import. Luckily for us, the price of oil has collapsed by more than the Rand. A big hit to the consumer is from the electronics sector, and if you are buying a new car.

Having a weak Rand is not all doom and gloom, especially because the oil price has collapsed. Buy more locally made goods, and do your travelling in Mzansi.


Bright’s Banter

South Korean juggernaut Samsung reported better-than-expected revenues and profits, thanks to the rise in remote working, which has lifted the demand for chips used in data centres. We know that the spread of the coronavirus has forced all of us to work and entertain ourselves from home.

This has helped Samsung grow its first quarter revenues by 5% year-on-year to $44.9 billion, a comfortable beat as compared to the 3% that was expected by analysts. Profits for the quarter came in at $5.2 billion up 3% year-on-year. Semiconductors, which keep the internet moving, is Samsung’s most profitable business. The division soared thanks to higher demand in streaming, gaming and video chat.

Samsung’s memory chip division also performed well. Other parts of Samsung’s business such as the consumer electronics and the smartphone business were affected by the shutdown of retail stores, and the halt in the supply chain.

These numbers give you an idea of what to expect from companies that compete with Samsung. In the short-term, we can see that semiconductor and server chips makers will enjoy a temporary surge in demand. Conversely, consumer electronics businesses such as smartphone manufacturers will see demand come to a standstill. In the case of Apple, it has a massive services business that will see it through.

Linkfest, Lap it up

Visual capitalist shows what progress humanity is making in finding a vaccine, and a treatment for those already infected with Covid-19 – COVID-19: Every Vaccine and Treatment in Development for COVID-19, So Far.

Apple looks like they are making a big move into Virtual Reality (VR) and Augmented Reality (AR) – Apple likely buyer of NextVR, a live event streaming AR/VR company being sold for around $100M.

Signing off

Boris Johnson was moved to ICU yesterday, you can clearly see the reaction in the Pound when the news was announced. Having a world leader in ICU makes this crisis a bit more real, and increases fear levels. The Rand is looking stronger today, now at $/R18.54.

Sent to you by Team Vestact.

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