The announcement of a possible coronavirus vaccine with 90% efficacy in a trial provided a boost for some of the companies most at risk of default as a result of the pandemic, with stocks climbing sharply in hardest-hit sectors.
Prior to the announcement, the oil and gas drilling sector had overtaken airlines as the sector with the highest median probability of default, according to a model devised by the Credit Analytics branch of S&P Global Market Intelligence.
The model calculates a probability of default, or PD, in the next year for 64,000 public companies across the world, based on market signals such as company share prices and other country- and industry-related risks.
For all sectors, the median probability of default climbed sharply in March as the spread of the coronavirus caused financial markets to panic. While broader markets calmed as a result of extensive fiscal and monetary stimulus, the PD model for oil and gas drilling companies climbed to 8.1% as of Nov. 4, having been as low as 6.3% on Oct. 23. That was enough for the sector to overtake airlines, which was at 7.7% on Nov. 4, down from 8.7% at the end of October.
The announcement that a vaccine developed by Pfizer Inc. and BioNTech SE could soon be deployed saw the share prices of oil majors rally, with Exxon Mobil Corp., Chevron Corp. and Royal Dutch Shell PLC enjoying increases of 12.7%, 11.6% and 13.4%, respectively.
Similarly, airlines Delta Air Lines Inc., American Airlines Group Inc. and Deutsche Lufthansa AG saw their share prices rocket 17.0%, 15.2% and 19.5%, respectively, at the prospect of reduced travel restrictions.
"Investors are taking this to be game-changing news judging by how they are bidding up shares in large parts of the market," Russ Mould, investment director at AJ Bell, wrote in an email. "In particular, all the stocks that were badly sold off this year are now among the biggest risers of the day as investors assume the vaccine will be deployed successfully and there is now a greater chance of earnings recovery in the short to medium term."
The possibility of a vaccine and a return to normal for businesses will be good news for other sectors that have struggled most, according to the PD model.
The leisure facilities sector saw its median PD rise from 1.7% on Nov. 1 to a peak of 22.8% on April 3 amid extensive closures of gyms and cinemas. And while the probability had dropped back to 6.8% by Nov. 4, the rate remained significantly higher than pre-COVID levels.
Similarly, the auto parts and equipment sector had taken a hit as a result of the slowdown in car sales and scaling back of production by manufacturers. The sector's PD topped 21.7% at its peak March 23 as global car companies stumbled, before the level reduced to 5.3% by Nov. 4 as global economies recovered some of the ground lost during the lockdown period.
However, there are concerns that investors have gotten ahead of themselves.
"While this is obviously a positive step forward, there is still a way to go. Pfizer will only be able to submit its vaccine for emergency use once two months of data has been collected. All eyes will be on the third week of November then as we wait to see if the numbers show the vaccine can be approved," Adam Vettese, analyst at multi-asset investment platform eToro, wrote in an email.