5 November 2020 (pre-recorded 3 November 2020)
Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.
[INTRODUCTION]
Juliet Schooling Latter (JSL): Hello and welcome to the Investing on the go podcast. I’m Juliet Schooling Latter and today I’m joined by Giles Rothbarth, co-manager of BlackRock European Dynamic. Hi Giles.
Giles Rothbarth (GR): Hi Juliet, thank you for having me.
[INTERVIEW]
[0:18]
JSL: The race for a vaccine is on. I wonder how many are in trials at the moment?
GR: Yeah, it’s a great question. So let me start off by doing the essential BlackRock disclaimer, that of course, anything that I talk about here is not an investment recommendation, but a purely factual analysis of what we’ve seen so far.
So there are, the good news on the vaccines, is that there are more than a hundred vaccines in development. And we have been spending a lot of time, as a firm and as a team, in looking at what, how successful these vaccines might be. Why? Because we’ve got a process of the fund and the team which is incredibly earnings and cashflow driven. We are just trying to identify the greatest inefficiencies in earnings and cashflow dynamics anywhere that we can find in the market. And when we think about 2021 and 2022, then the outcomes of, for the vaccines and whether or not we’re going to be still in these horrible rolling lockdowns, couldn’t be more important.
So out of the hundred vaccines in development, we’re really focused on five. And we’re focused on those five because they, we are confident that should, they be successful, they would be, they’d have a meaningful volume rollout, and we’re focused on those five because we’re expecting all five to have phase three readouts. So in other words, the final stage before Christmas. So what have we got?
We think that up first is likely to be Pfizer. Initially they thought that they might have early trial results out by the end of October. Clearly we’re a couple of days after that now. The CEO was out within the last 10 days saying it’s more likely to be mid-November. But we think that the phase two trial data looks pretty resilient, sorry it looks pretty positive on that front. It’s an mRNA based vector vaccine, which means that there will, there could be, infrastructure challenges, shall we say in getting this to the population – you’ve got to move it around at minus 80 degrees and the vaccine is two doses taken one month apart. So it’s not without its challenges, but the phase two data looks good.
The Moderna phase two data we think might be next. That actually looks a little bit better to us than the Pfizer data. It’s got a better response rate in the elderly and as good a response rate in the elderly as it does in the 18-55 category. But it’s another mRNA based vaccine. So one to be a little bit just cautious of it in terms of that, that rollout.
The one that I suppose we are least positive, which is slightly unfortunate as we sit in the UK, is the AstraZeneca-Oxford vaccine data. It’s looking for a slightly less efficacious primary endpoint. And then it’s had a delay because of safety issues, particularly in the US, with one patient developing inflammation of the spine. And then the final two that we really, that we do expect before Christmas, would be the Novovax vaccine and the J&J – Johnson and Johnson – vaccine. Those are more common based vaccines. So J&J for instance, is essentially injecting a common cold into you and is a more traditional vaccine development. So lots going on at the moment, incredibly relevant for, you know, market direction and the composition of that as we go into 2021.
[4:14]
JSL: And how confident are you that one will work and how soon could it come to the market?
GR: Great question. So if we knew nothing about that phase two data and simply looked for, I guess, what we’d call the external point of view. What, how likely is a vaccine to work if it’s had decent phase two data to get approval at phase three? And the answer for respiratory vaccines, when we look at historic examples, is around 80%. So I guess one way to think about this is that we’ve got five shots on goal between now and hopefully Christmas, each with an 80% chance of hitting the back of the net. So, you know we’ve got to be, I think, cautiously optimistic, that we could well be moving into this final phase for the market of this COVID downturn, whether it should be light at the end of the tunnel.
[5:09]
JSL: Giles, some people have suggested that getting a vaccine is one thing, but getting people to take it is another, I wonder what your thoughts were on that?
GR: Yeah and then, you know, on top of that, I guess it’s the speed of the rollout. So, how do we think about that? Well, certainly on the speed of the rollout, we’re pretty sure that we’re about to start breaking records. If there is a successful vaccine, this will be both produced and made available in a speed which will simply trounce any previous vaccine rollout. In short, you know, you don’t go short human ingenuity if you like within a fund. And never has so much human capital and effort been focused on solving just one problem. So on that front, we’re really, you know, we’re really pretty optimistic, that these companies and the governments have been working hard to think about the infrastructure rollout.
The other thing that clearly has been, has started in, and it started in earnest just over the course of the last few days, is the softer campaign. As you say, to try to make sure that people feel safe taking this vaccine. So to an extent, I think this is likely to be an element of some carrot and some stick. So the various ideas will come through to persuade people that it’s safe and, you know, government advertising campaigns. And then there will, there’ll be the, the nudge, if you like. So whether that is each and every country demanding vaccination certificates when you arrive at their borders, might be one idea. So clearly at the moment, if you travel to various countries, you are required to show a certificate that you’ve had a test. The same thing could be true, that you’ve had a vaccine. So by all means that you can avoid the vaccine if you want to, but you, the opportunities for you to travel around the world might be severely limited. That might be enough for many people to nudge them in the in the right direction. So I think there is, there is likely to be an element of carrot and stick.
The other interesting debate, and different countries will land in a different way on this, is what’s the right way to roll out a vaccine? Do you go for the vulnerable and the elderly first, which might intuitively feel right, or do you try and find your super spreaders in society? I don’t know if Juliet you’re down the nightclub on a Friday night…
JSL: Unfortunately not.
GR: …and as a vaccine super spreader, but you know, that in the research, it’s an interesting idea that that might be a faster way to essentially achieve an immunity through the population. So lots of different questions. But these are certainly for the rollout phases that have been run in parallel to the trial results going ahead. So for many of these vaccines, that doses are in fact already being produced, and we very much hope that they’re successful rather than having to be having to be thrown in the bin and destroyed.
[8:12]
JSL: Interesting stuff, thank you. And we’re aware of the impact of the virus lockdowns but what do earnings statements and company management meetings tell you about the current impact of the lockdowns?
GR: I think changing over time is the best way that we would, we’d frame most of the companies that we have spoken to over the course of the year and indeed very recently. So if we think about the first lockdown, there was clearly an immense, you know, worry and panic within equity markets about what that might mean. But most companies will have adapted incredibly quickly to either working from home or Zooms or WebEx or whatever it might be. And that has meant that the resilience of many sectors, and particularly anything to do with the consumer, has really shone through over the course of this year. And you’ve had various different components of sub-sectors that are selling into the consumer. So companies selling electronics goods, or indeed making semiconductors to supply to those companies, or indeed the luxury, the European luxury goods companies who are reporting Q3 earnings of anything up to double digit percent organic growth on a year on year basis. So, you know, for some of these companies, it’s almost as though COVID isn’t happening.
So companies have adapted really pretty quickly. When we think about what a second lockdown means, the answer I suspect is going to end up being incrementally better again, because they know what to expect, the consumers know what to expect, and therefore those companies that have already given some element of guidance as to Q4, have sounded fairly optimistic about the impact of restrictions across the whole of Europe.
So I’d point you to Bank of Ireland CEO talking last week on TV, talking about the Irish economy being much more resilient in this lockdown versus previous lockdowns. Why? Because schools have been kept open is a really primary reason. That means that that working parents can get to work. That construction sites have been left open, whatever it might be, the, governments had also been a bit smarter about the way that they’ve imposed lockdown restrictions. So we’re left with a we’re left with a starting point now of markets have panicked about second waves. It is possible, possible, that those second waves might start to see a flattening fairly soon and a change in the second derivative. That consumers and businesses have learned to adapt to lockdowns a little bit better than they had done the first time round, all when this overhang of a potential, that successful vaccine announcement, coming really any week now.
[11:13]
JSL: And if a vaccine does come through, does that materially change market leadership, do you think?
GR: I think it has an enormous impact on some sectors that have had a pretty torrid time during 2020. So, you know, which sectors have been hardest hit by the impact of COVID-19? Well clearly any sector which has gone, which has swung from a highly cashflow positive to loss-making. So think things like the airlines, hotel companies, which have seen occupancies just collapsd or indeed cruise companies. The other sector, which is, you know, even larger in its, in the competition in the markets, is the banks. And clearly the market has panicked that this downturn will be, if anything, worse than anything that the European banking sector has seen at any point over the last decade, which is no mean feat. Remember they’ve gone through the sovereign debt crisis, they’ve gone through Euro double dip recession. They’ve really, they’ve really been through the wars over the course of the last 10 years. This time around, you know, when I look at market consensus and where the prices are at an individual equity level, there is clearly panic in the markets and, should a vaccine come through, then I would expect to see enormous earnings upgrades on those sectors, where, as losses that are currently in forecasts get revised lower, and expect lending volumes to accelerate. And I would expect a re-rating of many shares within the European banking space. And so, you know, really it could well be game changing for big sectors that have been some of the worst performers over the course of 2020. If we end up in a 2021 which is a better year.
JSL: Well, we live in hope! Giles, thank you so much for your time today.
GR: Thank you for having me.
JSL: If you’d like more information about BlackRock European Dynamic, please visit fundcalibre.com and don’t forget to subscribe to the Investing on the go podcast.
