Analyst Insight
What to Expect From The New COVID-19 Variant (Omicron)
COVID-19 is back on top of the agenda for investors amid fears that the new Omicron variant could slow the global economic recovery from the nearly two-year pandemic. This new strain may also raise doubts over how quickly the Federal Reserve can move to unwind stimulus to tackle elevated inflation. Last week’s equity market sell-off was the worst we’ve seen this year so far, and should the virus be more resilient to vaccines and deadly, the possibility exists that markets could have a further sell-off. Importantly, we’ve seen markets continue to rise in the past, when the delta variant was considered a significant threat. Given this precedence, the possibility exists that investors see beyond the initial period that could cause a sell-off. Investors should note that its early stages so the officials do not yet possess sufficient data. As such, it’ll require more time to determine the full severity of the virus. Dr. Anthony Fauci, the top U.S. infectious disease official, told President Biden on Sunday that it will take approximately two weeks to have definitive information on the new coronavirus variant Omicron. Markets can have several reactions, varying over the short, medium and longer term, depending on the progression of the data and what the data ultimately indicates. Below we cover possible scenarios on how global financial markets may react once more data is released.
Scenario 1: Further sell-off
This scenario could materialize should the variant prove to be more resilient and deadly than other variants. The UK has already begun to tighten travel restrictions and other countries such as the U.S. are following suit. This could further slow global economic growth. At present, markets have grown significantly such that heightened risks such as a new variant could temporarily stall index level growth. Further, central banks broadly have little room to effectively navigate any significantly negative outturns given the already accommodative positioning we’ve experienced.
Scenario 2: Market correction
In this scenario, its likely that COVID-19 therapies are capable to tackle the new variant and the short-term scare of the Omicron variant could simply be short-lived. If further evidence shows that the spread of the new variant in Europe is scarce, then markets will likely retrace. Importantly, markets could also simply look beyond the initial period of uncertainty, similar to what was seen from the Delta variant.
Scenario 3: Just Overexuberance
Currently, there is little evidence of a broad spread of Omicron, however, it is clear that markets fear another significant wave of a Covid-19 variant. This may just prove to be a wake-up call for investors as it relates to positioning and countries in terms of health and precautionary measures. Importantly, this could simply be overexuberance as initial information suggests that symptoms from the variant are mild to moderate. As investors try to predict the severity of the variant, initial volatility could remain slightly elevated, but should subside as we’ve seen with previous variants, particularly considering initial indications.
It is our opinion that the last two scenarios are more likely to occur. As it relates to our local market, we don’t expect significant price movement in response to the threat of the Omicron variant towards the end of the year. However, depending on how global markets react, the possibility exists that there are more direct implications on the tourism as well as the Manufacturing & Distribution sectors.
Capital Markets positioning
Since February, we’ve seen a rotation in and out of COVID-19 beneficiaries and economic recovery beneficiaries. More recently, there has been greater rotation into recovery beneficiaries, but in all likelihood, any further sell-off on the back of a new variant would have negative implications for these companies. In the event that sales in recovery beneficiary stocks like travel, tourism, bars and restaurants etc. are overdone, it presents an opportunity for buyers. Moreover, several industries continue to have tailwinds, in our opinion, that should last beyond the initial period of uncertainty surrounding this new variant. These include financial stocks with balance sheets that have low liability exposure to money market rates and could benefit from current, more restrictive central banking policy, as well as some tech companies that remain pivotal for long term secular trends such as Environmental, Social and Governance (ESG) centric practices etc, in light of current expectations for fighting climate change. These companies have long term growth supports that should add value to portfolios beyond the short-term bout driven by Omicron.
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Written by Jonathan Cook, Investment Strategy Analyst |
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