Omicron is a buying opportunity

Variants of the Covid-19 virus have been spreading for a while, but a new one shows far more variants and is potentially very troublesome. The Omicron variant from South Africa has thirty two different mutations on the spike protein that is crucial in introducing the Covid-19 virus in the body. No one knows if the vaccines have any efficacy against them as it is too early to tell, though that should become evident in the next few weeks. 23.8% of the population in South Africa is vaccinated with Johnson & Johnson or Pfizer which means we will only know for two vaccines, trials for others would take longer. As a consequence, travel from the UK to South Africa has been curtailed and this is likely to rapidly expand as this new variant spreads very rapidly.

What are the consequences?

The consequence of this new variant is that the travel and tourism industry should be hurt as it could mean hard lockdowns spreading in Europe and potentially later in Asia and the USA. Oil prices are also under pressure as it means that many might be travelling less than what a very bullish market anticipated. It could affect the supply-chain in China again as workers become unavailable (which is delayed inflation and suppressed demand) and some spending to restaurants et al. The impact is broader than this on the psychology of a market bulled up on risk and consumers that had thought the health crisis was steadily drifting behind them.

Financial markets will probably move from reducing bullish positions to watching if retail gives up to buy on dip amid dispersion in various asset classes – we do not expect this. That depends crucially on knowing 1. Which vaccine if any can handle this variant 2. How much time it will take to develop new vaccines 3. How much time will it take to produce and deploy them. The experience suggests another year and two for EM is ahead of us in the worst case scenario. But very importantly, the South African reports that symptoms of the virus are mild and now the onus will be on accelerating the pace of vaccine delivery to EM to avoid new variants.

What does it mean?

The uncertainty around this new variant means that the market will need weeks to figure out if some of the vaccines work. In such a period of uncertainty where the path of growth and inflation have a high degree of uncertainty, the question is how to position for the worse case and the more probable one of a mitigated reality. The worst case suggests long-dated US Treasury. The far more probable case is that some existing vaccines may work but maybe not perfectly and new ones need to be developed. In such a time when the symptoms of Omicron are mild represents a buying opportunity. That suggests European equity, European Credit which should weather well these uncertain times as expectations of ECB tightening are delayed. Mostly, it is a reminder that the financial analysis of companies is crucial as these are long-term investment subjects to what is sometimes wholly unpredictable.

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