November 2021 Investment Update

Last Friday, the world and the financial markets were introduced to a new coronavirus variant: ‘Omicron’, named after a letter in the Greek alphabet. The first news publications on the new variant, as well as the WHO’s classification as a ‘Variant of Concern’, prompted equity investors to exit the market.

The European stock markets ended with losses of over 4%, while the US markets fell by about 2 to 2.5%. The reduced liquidity owing to Black Friday may have strengthened these market movements.

Although the markets appeared to have stabilised again somewhat during the early Monday morning trades, they are still likely to face several more weeks of uncertainty.

Not much, really – pretty much the same as when other variants had only just emerged:

• The new variant was first identified by South African scientists last Wednesday, but has since also been detected through testing in a growing number of other countries. Last Friday, the WHO classified the new variant as a very high-risk ‘Variant of Concern’, which has been named after the Greek letter ‘Omicron’, skipping the letters ‘Nu’ and ‘Xi’ for linguistic and political reasons.
  
  
• The Omicron variant has attracted great attention due to the unusually high number of mutations (over 50) – including of the spike protein, which allows the virus to latch on to host cells – compared to the original Wuhan variant. Its seemingly high contagion rate makes this a very high-risk variant. Pending tangible results, which aren’t expected for another few weeks, South African doctors currently have insufficient evidence of the severity of the new variant’s symptoms – which, at best, are as mild as those of a common cold.
  
  
• The high number of mutations has raised concerns about the effectiveness provided by current vaccines. Pfizer’s and Moderna’s mRNA vaccines, for instance, are specifically designed to mimic spike proteins in order to elicit an immune response. Both pharmaceutical companies have already announced that they are currently testing their vaccines against the Omicron coronavirus variant, and that if the existing vaccines prove less effective, a modified vaccine can be manufactured within two to three months.
  
  
• In attempts to curb further spreading, new travel restrictions have been imposed in several countries, with Israel and Japan having closed their borders to international travel, while others have banned or limited travel to and from South Africa. However, the new restrictions currently in place in most European countries are mainly aimed at combating the Delta variant.

Slower stock markets mean lower interest rates. Last Friday, it seemed like March 2020 all over again. Uncertainty is detrimental to stock markets. The new variant is feared to undermine – already fragile – economic recovery, although we can only guess what impact it might have at this stage. The economic impact of each previous variant has consistently decreased compared to the first one.

Loss may have been driven by the limited liquidity in a large number of markets due to Black Friday (the day after US holiday Thanksgiving). There is once again a clear divide between winners and losers in the coronavirus economy. Stay-at-home shares and Pharmaceuticals both performed well.

Equities in the Energy sector, Airlines, Consumer Services sectors such as Tourism, as well as financial companies, suffered badly. Despite this decline, there is no need for adjustment yet – this would require markets to fall by approximately 10%.

Global equity markets are currently down around 3.5% from last week’s peak levels, while Europe saw a sharper decline (around -6.5%) mainly due to fear of European recovery being hindered by the measures in place to curb the Delta variant. Given the level of energy prices and inflation, the drop in oil prices by around 10% is actually not bad news.

We are currently pursuing a market-neutral equity investment strategy, as we will be reducing our overweight positions in favour of cash in October, which we will keep in reserve in case, for example, an adjustment is actually needed and/or the economic outlook improves further.

While the considerable uncertainty surrounding the new variant is keeping us on the sidelines for the time being, the course can change in a heartbeat in this kind of environment.

Our overweighting in pharmaceutical stocks within the equity portfolio helps, but we lost some ground by overweighting the euro area and the Financials and Consumer Services sectors.

We will also be reviewing our economic scenario again over the next few weeks. For the time being, the new measures don’t seem to have a major impact on the economic outlook.

• Scientific research on the Omicron variant: in a few weeks from now, we will know more about the characteristics of the new coronavirus variant (infectiousness, transmissibility, pathogenicity) and the effectiveness of the vaccines against it.
  
  
• Developments surrounding the coronavirus: is the virus spreading rapidly in South Africa and other countries? Are there any indications of a sharp rise in the number of people with severe symptoms in South Africa? The latter could send investors into a frenzy of panic. The three previous dangerous variants – Alpha, Beta and Delta (formerly known as the British, South African and Indian variant, respectively) – also sparked concern at first, but nevertheless the economy continued to recover and the stock exchanges managed to set new records.
  
  
• Responses from public authorities: will countries start reimposing stricter measures and lockdowns? Will borders be closed again? restrictions could stifle economic recovery and exacerbate supply chain problems.
  
  
• Central banks: over the past few weeks, the financial markets were dominated by the anticipated phasing-out of central bank support. The Federal Reserve has started to taper its QE programme and a number of rate hikes have already been scheduled for next year. So we now have to wait and see how the central banks will respond.