"More than 90% effective" Pfizer vaccine emerges, in line with our forecasts

In massive news overnight, Pfizer and its German partner BioNTech have reported that its novel, two dose "mRNA" vaccine has been more than 90% effective thus far in protecting people against COVID-19 in a 44,000 person trial, which has driven a stonking, 3% rally in the Dow Jones Index. The New York Times reports:

Analysis found that the vaccine was more than 90 percent effective in preventing the disease among trial volunteers who had no evidence of prior coronavirus infection. If the results hold up, that level of protection would put it on par with highly effective childhood vaccines for diseases such as measles. No serious safety concerns have been observed...Pfizer plans to ask the FDA for emergency authorization of the two-dose vaccine later this month, after it has collected the recommended two months of safety data. By the end of the year it will have manufactured enough doses to immunize 15 to 20 million people, company executives have said.

You might recall that the approval of an effective COVID-19 vaccine(s)--with subsequent public distribution late this year and in early 2021---has been a core part of Coolabah's highly heterodox central case since February 2020. This contrarian perspective, which has been frequently discounted by others, was based on the analysis prepared by our five portfolio managers and 13 analysts (including four PhDs) coupled with proprietary advice rendered by world-class immunologists on the probabilities of a successful vaccine emerging in 2020 care of the unprecedented global effort to develop a solution to this 1-in-100 year pandemic. 

If you are wondering how medical experts have responded to the Pfizer news, the NYT has canvassed a number of authorities:

“This is really a spectacular number,” said Akiko Iwasaki, an immunologist at Yale University. “I wasn’t expecting it to be this high. I was preparing myself for something like 55 percent.” If the final vaccine ends up with that level of efficacy, it “would be higher than your regular flu vaccine, and this vaccine could have a serious impact on bending the curve of this outbreak,” said Dr. Saad B. Omer, the director of the Yale Institute for Global Health. 

Pfizer's results are especially encouraging because another leading vaccine developer that we have regularly drawn attention to, Moderna, uses similar mRNA technology. Here the Wall Street Journal explains:

Pfizer and BioNTech’s vaccine uses a new and unproven technology, known as mRNA, short for the molecular couriers called messenger RNA that carry genetic instructions to cells. The shots deliver mRNA that prompts cells to make a synthetic version of the spike protein that juts from the surface of the new coronavirus. That protein triggers the immune system to defend against the virus. Moderna’s vaccine also uses the mRNA technology. “This is great news as it shows mRNA can work,” Moderna Chief Executive Stéphane Bancel said. Moderna is on track for an interim efficacy analysis and a two-month safety follow-up for at least half the people in its clinical trial this month. 

Approval of a tractable COVID-19 vaccine has been but one significant part of Coolabah's unique, multi-faceted outlook since the advent of the pandemic, which has included, amongst other predictions:

• the non-consensus idea in February 2020 that central banks would need to launch expansive quantitative easing (QE) to mitigate extreme "market failures" that would emerge because of the inability of investors to price the risks around a truly global pandemic (recall the Fed initially ruled-out QE when it cut rates in early March, as did the RBA, only to belatedly come to the party, as we anticipated);
  
• the corollary that pervasive QE would propagate aggressive mean-reversion in credit spreads of high-grade and liquid bonds that benefited from central bank support combined with a secular speculative melt-up as equity beta rallied more generally (whereas Coolabah spent about $900m net buying assets in March as credit spreads blew-out to historic wides other hedge funds were convicted that the March shock presaged a much more protracted downturn);
• detailed quantitative forecasts released in March 2020 that concluded that the first wave of COVID-19 infections in Australia, the US and Europe would peak in early April, months ahead of epidemiologists’ estimates, which we felt would serve as another catalyst for a risk rally in April/May (see Bloomberg's coverage of our research here);
• projections that Aussie house prices would only experience a tiny 0% to 5% correction over a short six month period (they ended up falling 1.7% between April and September) following which they would rebound robustly (national dwelling values officially climbed by 0.4% in October 2020 according to CoreLogic). The consensus here was for house price falls of 10% (CBA, ANZ, NAB, WBC), 15% (UBS, Morgan Stanley), 20% (AMP) or 30% (various doomsayers). Coolabah maintains its position that national dwelling values will increase by at least 10% to 20% in the years ahead; 
  
• the view that Australia's jobless rate would significantly outperform consensus expectations for a peak unemployment rate around 10% by quickly settling at a much lower 6% to 7% (it is currently 6.9%) with the oft-mooted September "JobKeeper cliff" turning into a non-event as the government furnished a smooth glide-path out of these subsidies;
• detailed quantitative modelling suggesting that Victoria's second COVID-19 wave would peak in late July when once again the epidemiologists’ predictions were far more pessimistic (the final peak was around the 31st); and
• the more recent expectation that the RBA would be compelled to initiate a new round of longer-dated QE involving purchases of 5-year to 10-year government bonds to ensure Australia's exchange rate and economy are not artificially disadvantaged by the QE programs being implemented by other central banks around the world, including the RBNZ, Fed, BoE, ECB and BoJ to name a few. The RBA eventually announced its new QE initiative in November, the composition of which was consistent with our priors.

The key take-away for investors is that relentlessly unconventional thinking fused with rigorous research can help power substantial portfolio alpha. We've tried to put this into practice with extremely active trading throughout this unique shock. This has involved us buying and selling more than $20 billion of bonds in the last 10 months, including over $13 billion of investment-grade credit and north of $7 billion of government bonds. 

And I would like to think that this has translated into performance across our $4.6 billion of FUM. Our long-duration, AA- rated Active Composite Bond Strategy has returned 7.62% before fees (it is an insto-only product with confidential fee terms that is not available to retail investors) over the 12 months to 31 October compared to the Composite Bond Index's 3.99%. 

Along similar lines, Coolabah's zero-duration, AA- rated Long Short Credit Fund has returned 7.48% gross (5.0% to 5.2% net) over the last year compared to the -6.5% loss suffered by Aussie shares plus dividends (the All Ords Accumulation Index), the 0.35% return on the Bloomberg Credit Hedge Fund Index, the 1.90% return offered by the AusBond Floating-Rate Note Index, and the 1.98% recorded by the Solactive ASX Hybrids Index.

The abovementioned market dynamics have a long way to run yet. We are just starting to see another global round of QE kicking-off with the Bank of England committing to spend GBP150 billion, which will result in it owning about half of all the gilts on issue. The ECB will likewise shortly follow-suit, and the Fed will presumably be next in line. And while one can credibly criticise the theoretical merits of QE (as I have previously), that is an intellectually vainglorious exercise when the entire world is engaged in it. If the RBA does not expand its balance sheet in the same way as other central banks, it will not be able to meet its legislated obligation to deliver full employment. We'd be cutting off our noses to spite our faces.

The RBA has therefore correctly concluded that as a small open economy, Australia must compete on a level playing field where the rules of the game are set by foreign actors (ie, global central banks).