Omicron variant uncertainty should put investors off amateur virology

Asia's Tech News Daily

the Omicron variant, asset prices, introduce travel restrictions, in Wuhan, to supply chains, as “transitory”, supply chain disruptions, “zero Covid” policy

Here are just some of the things we do not know about the Omicron variant of Covid-19: the severity and transmissibility of infections, the efficacy of the current crop of vaccines against the new strain and the degree to which Omicron has spread around the world.

In short, there is much we do not know about the variant, certainly not enough to gauge its impact on the global economy and financial markets. Yet, this has not stopped investors from reprising their roles as amateur virologists.

Ever since the Covid-19 pandemic erupted, investment banks have produced reams of research on the virus to help determine the level of disruption and its implications for different sectors of the economy and asset prices. Some of the analysis has been remarkably rigorous, involving assessments of reproduction numbers – the average number of new cases generated by an infected individual – at different stages of the pandemic.

Major providers of financial data, such as Bloomberg and the Financial Times, have tracked infections and deaths and monitored vaccination rates. They have even compiled a “Covid Resilience Ranking” showing where the virus is being handled most effectively with the least amount of economic upheaval.

The amateur epidemiologists are at it again. No sooner did South Africa announce it had discovered a new variant, prompting other countries to rapidly introduce travel restrictions, than investors began speculating about the threat posed by Omicron. Notably, they focused on the possibility that it is able to evade vaccine protection, making stricter curbs on mobility more likely.

While markets loathe uncertainty, predicting the economic and financial consequences of the pandemic has been a fool’s errand. Two years after the virus first surfaced in Wuhan, the pathogen continues to confound even the most experienced of virologists.

Whether it was the speed at which markets bounced back from the brutal virus-induced sell-off in March 2020, the arrival of vaccines within a year of the disease being labelled a pandemic, the scale of outbreaks in countries and regions that appeared to have the virus under control or the severity of the shock to supply chains, investors have repeatedly misjudged the effects and trajectory of the pandemic.

This partly explains why there has been a big disconnect between the amount of research and analysis on the virus and the relative unimportance of Covid-19 as a key driver of sentiment. While some investment strategists have become virus modellers, most investors have given up trying to second-guess the pathogen’s impact on the economy and markets.

In Bank of America’s latest fund manager survey, published on November 16, Covid-19 did not even figure in the top three “tail risks” in markets. Only 5 per cent of respondents deemed the virus a serious threat to sentiment.

While the emergence of Omicron is bound to make investors more sensitive to the pandemic, the acute uncertainty about the new strain renders futile any effort to accurately assess, let alone price, its effects. Investors have enough problems getting their heads around more familiar risks without having to speculate about the answers to questions epidemiologists are better-equipped to address.

The most important issue for markets now is the increasingly hawkish stance of the US Federal Reserve in the face of the threat posed by Omicron. On Tuesday, Fed chair Jerome Powell startled investors by signalling his support for a speedier withdrawal of stimulus, going so far as to say it was no longer appropriate to describe the surge in inflation as “transitory”.

Powell has struck a hawkish tone before, only to reverse course when markets took fright. However, the Fed faces a more dangerous inflation threat today, one that could become more menacing if Omicron exacerbates supply chain disruptions.

In a report published last Sunday, Academy Securities noted that “for the first time since the pandemic started, we faced a sell-off where it is unclear what the Fed and other central banks will do.”

What is clear, however, is that Omicron will embolden Beijing to pursue its strict “zero Covid” policy. The resumption of lockdowns and tougher social distancing rules in parts of Europe and the reimposition of curbs in some Asian countries that had lifted restrictions will inflame the debate over pandemic exit strategies.

It is also clear that Omicron has arrived at a perilous time for markets, which are priced for near perfection. The benchmark S&P 500 equity index is less than 5 per cent below its all-time high, while yields on US “junk” bonds – often seen as the canary in the coal mine – remain at historically low levels.

Virologists themselves are unsure about the severity of the danger posed by Omicron. Investors would be well-advised to confine their predictions to the economy and markets, where there is more than enough uncertainty with which to contend.

Nicholas Spiro is a partner at Lauressa Advisory

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