PFIZER, a research-based global pharmaceutical company, recently announced much-needed news since Covid-19 was declared a global pandemic in March 2020.
Tafara Mtutu:Investment analyst
Together with BioNTech SE, Pfizer’s early test results on its Covid-19 vaccine exceeded set efficacy goals and prevented more than 90% of symptomatic infections in a trial which enrolled over 40 000 participants.
According to Bloomberg, Pfizer shares rose as much as 15% and were trading 8,8% higher at 3:14 p.m. in New York on November 9, 2020, while BioNTech American depositary receipts surged by as much as 24%.
The news fuelled a global rally that added more than US$1,8 trillion to the value of the MSCI All Country World Index, an international equity index, which tracks stocks from 23 developed and 26 emerging markets countries.
It is also interesting to note that the price of gold fell from US$1,928.07/oz on November 6 to US$1,878.69/oz on November 11, and the downtrend could persist as Pfizer releases more promising results.
The negative correlations between Pfizer’s share price and gold stems from the need to preserve investment value and the implications of the new drug in global markets.
Before the vaccine was announced, global equity markets were marked by so much uncertainty and poor fundamentals especially after the resurgence of Covid-19 infections in Europe. This is typical of black swan events such as the Covid-19 pandemic, the 2008 Global Financial Crisis and the Dotcom Bubble of 2001, which are usually followed by uncertainty and dismal performance by traditional financial instruments that mainly include bonds and equities.
The rational investor, fearing to lose out on their investments as economic fundamentals weaken, moves their investments to safe-haven assets. Chief among these safe-haven assets is gold, which tends to outperform in the periods after black swan events.
Gold is special because of its unique qualities, which we will briefly touch on. Gold is limited because it is extremely costly and dangerous to synthesise. The mineral is so inert that it does not react with any other element on the periodic table. As a result, only the gold that has been mined since the dawn of mankind, which is roughly 200 000 tonnes, is what is available. According to gold.org, this is equivalent to only three and a half swimming pools or a 21x21m cube.
Further, not all this gold is investible because some of it is used in medicine and electronics. Secondly, gold does not corrode, which makes it a sustainable store of value. The safe-haven status of gold is further affirmed by a consensus on the high value placed on gold which dates back to biblical times. Given the stability of the metal and its limited supply, the price of gold tends to respond positively whenever demand increases as a result of portfolio recalibration during downturns.
However, the vaccine by Pfizer is the metaphorical light at the end of the tunnel that will likely bring confidence in equity markets in the coming months and investors have already begun moving away from gold and back into equities as they anticipate equities to recover.
Further to this is Joe Biden’s win in the recent US elections that also supports the bearish expectations on the price of gold.
The new administration is largely expected to lower the elevated global geo-political risk, which is conventionally positively correlated with gold prices. According to Wendy Cutler, a former USTR trade negotiator, Biden’s policies will be fairly predictable compared to his predecessor’s abrupt policy changes and this will lower the level of geo-political risk which, in turn, will reduce investor’s affinity for safe-haven assets like gold.
The bullish run in equities that is expected to play out at the expense of gold prices also holds negative implications for Zimbabwe. Historically, the southern African country generates most of its foreign currency from minerals and, more specifically, gold.
The bull-run in gold prices in recent months offered Zimbabwe a unique opportunity to take advantage of the bullish gold prices, but country-specific factors, such as smuggling and a difficult operating environment, limited gold deliveries to Fidelity Printers and Refiners (Zimbabwe’s sole gold buyer) in 2020.
The very possible downturn on gold prices at the onset of vaccine dispersions in the coming months will minimise Zimbabwe’s window of opportunity, which it desperately needs to resolve the persistent foreign currency crisis. That said, the window remains open, albeit narrower, at lower price levels ranging between US$1,740/oz and US$1,760/oz over the next few months.
The investment case remains solid for some gold miners in Zimbabwe, like Padenga whose gold mining entity Dallaglio will remain profitable for gold prices beyond US$1,500/oz.
On the other hand, the vaccine also comes with hope of improved macro-economic fundamentals globally. This could also dispel fears borne out of uncertainty among international investors, and prompt them to reconsider gaining exposure in emerging markets after the flight to safety that was observed earlier this year.
Flight-to-safety is a financial market phenomenon, occurring when investors sell what they perceive to be higher-risk investments (notably in emerging markets) and purchase safer investments, such as gold and other precious metals. This phenomenon has been a key driver behind international investors’ scepticism in emerging markets throughout 2020.
A more positive outlook in 2021 on the back of the vaccine announcement could see a rebound in FDIs into emerging markets such as Zimbabwe and South Africa. The establishment of the USD-denominated Victoria Falls Stock Exchange in Zimbabwe is also likely to complement the positive outlook. Perhaps now is the time to consider investing in the stock market experience capital gains as equities recover.
The Zimbabwe Stock Exchange’s current market capitalisation of US$2,2 billion is at a 60,4% discount compared to its eight-year average of US$5,6 billion. Delta Corporation, for example, consistently traded around US$1 per share between 2013 and 2018 but currently trades at an equivalent of US$0,18 per share.
At such mind-blowing discounts, it boggles the mind of investment professionals who understand the true value of ZSE-listed stocks and warrants an upward adjustment of stock prices in the coming months.
Mtutu is an investment analyst with Morgan & Co. He writes in his personal capacity.