When we thought Covid-19 was a thing of the past, and we were starting to live in this new normal, suddenly a new variant, the Omicron, more resistant and with a higher transmissibility, has created a new scenario of uncertainty. Governments have started to put in place new restrictions, some borders have been closed, and under the current circumstances of our globalised economy, the markets have started to suffer from this uncertainty.
Under this new scenario, and with the Omicron among us, we have received the first commentaries from professionals within the asset management industry. We have received some insights from Richard Bernstein Advisors, Fidelity, Generali Investments , Federated Hermes, La Financière de l’Echiquier and Natixis IM.
Dan Suzuki, Deputy Chief Investment Officer at Richard Bernstein Advisors LLC
The market had started to look forward to easing supply chain disruptions, but a vaccine-resistant variant. Omicron, would certainly mean that those disruptions will persist much longer.
This would put central banks in the very difficult position of having to choose between supporting growth and employment or fighting against uncomfortably high inflation.
Anna Stupnytska – Global Macro Economist at Fidelity International
Despite some comments over the weekend about omicron’s mild symptoms, the new virus variant appears to be a serious concern given its association with higher transmissibility and immunity neutralisation
While there is still much uncertainty about its other characteristics such as mortality risk, this news has the potential to be a game-changer for the near-term macro and market outlook – and should be treated as such.
The speed of policy reaction has been notable with a number of countries imposing travel bans from South Africa within a matter of hours. Learning from mistakes in dealing with the delta variant, policymakers seem to be showing determination to act pre-emptively. While it’s possible (but far from certain) that the existing vaccines might still be effective or can be tweaked in a matter of weeks or months to fight the new variant, to limit its spread before this happens, more stringent domestic and international mobility restrictions might return as we head into the end of the year. The degree of stringency will likely vary across countries depending on the spread of the new variant and emerging new information on the degree of its vaccine resistance, but also on the political appetite to cause more economic damage as well as to risk social unrest.
Global growth risks have already been skewed to the downside on a slowing China and global energy crunch as the key headwinds. The new virus variant adds further uncertainty to the macroeconomic and policy outlook over the next few months. With inflation likely to stay sticky at elevated levels, and further supply chain disruptions potentially pushing it even higher, central banks are facing an ever more challenging policy dilemma. In the interest of protecting growth and labour markets, some hawkish rhetoric from the likes of the Fed and the BOE might have to be scaled back, at least until the new variant reveals its cards. For markets, this festive season might turn out to be more volatile than investors have been hoping for.
Elisa Belgacem, Senior Credit strategist, Generali Investments
Omicron risk and credit markets. The key market question for the coming days and weeks is whether the fast spreading new Omicron variant will reduce vaccine efficacy versus serious cases and deaths.
Scientists may need over two weeks to find out, but the high number of relevant mutations are worrying. Beyond the new travel restrictions already announced, Omicron may imply renewed social restrictions, a harm to growth and new bottlenecks adding to inflation. Nonetheless, mRNA vaccine producers may be able to adjust the vaccine relatively quickly and Covid drugs could be available within 100 days.
Any new lockdowns would be bad news for risk sentiment, as shown by the sharp correction on Friday. For Credit, the additional uncertainty is adding to an already fragile environment which is in part pricing the removal of the ECB’s APP in 2022 (which is not our scenario, though, as we believe the ECB will continue to buy credit until end-2023). Yet a prolonged lockdown may be cushioned by some relief by more reassuring signals from fiscal and monetary policy. Also primary market will soon pause as December is traditionally light in terms of issuance. Investment grade Credit will feel the headwinds, but may still prove resilient against a sharper sell-off.
Vincent Benguigui, Senior Credit Portfolio Manager, at the international business of Federated Hermes
Friday was the weakest day in the financials market since the beginning of the year where we saw all risky asset classes sell off. This spark of volatility, triggered by fears of the latest covid 19 variant, is a reflection of investor nervousness in anticipation of an unexpected event – the famous black swan theory.
As information unravels, the market bounces back and has already done so from the local lows. Our chart of the week highlights this response. Both realised and implied volatility have traded in line recently, but the Friday sell-off broke this correlation. Implied volatility (the cost of hedging) underperformed significantly compared to realised volatility on the market.
We expect to see increased headline volatility like this in the upcoming weeks and months.
Olivier de Berranger, Chief Investment Officer at La Financière de l’Echiquier
A gust of panic swept in after Thanksgiving. Investors have woken up to a hangover: the major indices dropped between 3% and 4% as soon as the European markets opened.
To understand why, we need look no further than concern about the emergence of a new variant discovered in South Africa. Its numerous mutations are fuelling fear that it is more contagious than other known variants, and also that available vaccines will prove less effective against it. For the moment, the information on this variant is still fragmented and largely based on modelling, rather than purely factual data: perfect circumstances for an overreaction.
It must also be said that this correction occurred at a moment of reduced liquidity, with the US market closed on Thursday 25 November and shorter opening hours on Friday 26. These conditions go some way toward explaining the erratic market reaction. Moreover, this correction comes at a particularly buoyant time, as, prior to this episode, the major equity indices had all gained over 30% since 9 November 2020, when the first vaccine against COVID-19 was announced. This upward movement also managed to shake off the health risk despite a wave linked to the delta variant and the resurgence of seasonal waves.
Apart from equities, the reaction has been relatively exaggerated, as interest rates have fallen sharply, in anticipation of a more accommodating posture from the central banks. In terms of securities, the hardest hit have naturally been those linked to the reopening of the economy, while “stay-at-home” stocks have come off more lightly.
While this new variant may raise fears of fresh restrictions likely to reduce the movement of people, goods and services, it should be stressed that the health crisis we have endured for nearly two years has made companies and states more resilient in the face of such obstacles.
It is probably too early to judge whether or not the market reaction is justified. Above all, we should note that this variant is poorly understood and therefore its impact cannot be predicted yet. It is a cause for concern because its high number of mutations involve the spike protein used by the virus to enter the human body. On the other hand, we cannot tell for the moment just how dangerous it might prove to be. If it were to intensify, it could well spread like wildfire and bring the economy to a standstill once again. But if the danger turns out to be minor, it could be just a flash in the pan, after which equities and the economy may return to even stronger growth.
Jack Janasiewicz, portfolio manager en Natixis IM Solutions
Shoot first. Ask questions later. The market has been itching for a reason to sell off and it finally got one in the Omicron variant. But how should the market be thinking about this?
We need to answer the following questions in order to get a better understanding of market implications: How contagious is the variant? How virulent is it? And how proficient are existing vaccines in fighting it? It will take some time before we get the answers to these uncertainties which only adds to volatility and de-risking in markets.
Government response in the meantime will drive market sentiment. The US has been loathe to re-engage draconian restrictions while Europe has hinted at various forms of lockdowns and China still targeting a zero tolerance strategy. The more open and mobile the society, the less economic damage. And with the knee jerk reaction to impose travel restrictions across the globe, it’s not surprising that travel and leisure stocks are taking a hit along with oil prices.
Longer term, should Omicron prove to be more serious, labor market concerns and supply chain disruptions could intensify as people’s willingness to work in person could once again begin to weigh on markets. Plenty of questions with limited answers so far. And it’s not surprising that we see a ‘sell first ask questions later’ response by the investors.