Omicron the new Delta? Whilst we don’t know where the exact economic outcomes will end up being from Omicron, we thought it was worthwhile sharing our perspective on what we know, what we don’t know, implications for markets as we see today and how we are navigating the potential volatility we expect to see.

Background – After recent surges of Delta plaguing continental Europe, investors were vigilant around the risks building from a spike in coronavirus cases. Asking questions like whether the emerging cases and lockdowns would create more headwinds to the recovering global economy? Then late last week we awoke to news that the UK had slammed the borders closed to 9 countries from Southern Africa. For us this was significant. The risks from another mutation had long been one of the key focuses for us as to what might “upset” markets. Therefore, the early response from the UK triggered us to reassess our positioning and outlook.

What we know The virus appears to be highly transmissible and different to previous variants. It has mutated significantly, with 32 mutations on the spike protein, which compares to Delta that had 9. Vaccines have been designed to target the spike protein, so these mutations pose a threat to the success of vaccines. It also appears to be outcompeting Delta, and is becoming the dominant strain in South Africa with 75% of recently identified and sequenced cases being the Omicron variant.
Source: NICD

What we don’t know

  • Will the virus be more severe? Whilst symptoms so far look less severe than Delta, until more information is gathered on the variant concluding this is likely premature given the young demographic of most of the known cases, which could be influencing results
  • Given the significant level of mutation present, will the vaccines be effective? We likely won’t know the answer to this question for at least a couple of weeks while testing is undertaken. Prominent CEOs of vaccine producers have speculated both sides of this argument in the press
  • Will anti-viral medication be effective at preventing hospitalisation? Verdict still out, although commentary from drug manufacturers at this stage appears positive.

Implications for markets
We currently foresee the following:

  • Border closures and increased quarantine requirements will see pressure on a number of industries
  • Near term reopening beneficiaries such as airlines, travel and energy businesses will see volatility in earnings and stock prices
  • Omicron will likely keep stress on supply chains
  • Immigration and labour markets will remain tight in many economies, as travel remains restricted
  • Inflation likely stays higher

We are now in a situation where monetary policy will almost certainly be tightening with the Omicron variable perhaps only delaying the timing by a month or two. Inflation has become a political issue and increases the risk of faster rate hikes. This would be a problem for markets convinced of slow and controlled hikes. The confluence of economic uncertainty and rising interest rates may continue to drive equity market volatility and rotation within investor positioning.

What does this mean for investors? Entering this environment having healthy cash balances positions investors well to capitalise on attractive risk reward propositions as they emerge. Whilst we don’t know exactly how Omicron will play out, investors will need to navigate this potentially volatile environment through being nimble and actively taking advantage of opportunities presented as they appear.