Strategists urge investors to monitor omicron volatility and stay on course

LONDON – Stock markets may face volatility in the weeks following the omicron Covid-19 variant, but strategists and economists warn investors against hasty action.

Global stocks fell sharply on Friday as news spread about this variant and its potentially mutational profile. Equities in the US and Europe regained some of their losses on Monday, but futures fell again on Tuesday amid concerns over vaccine efficacy in the face of the omicron option.

Health officials said it could take several weeks to see if the new strain can escape existing vaccines and antibodies and how severely it affects those infected.

In the meantime, however, many countries have imposed new travel restrictions, and strategists on Monday suggested that the market would remain tuned in to ongoing research into this option in the near future, causing volatility.

But while Friday saw the worst pullback in stock markets in 2021, strategists and economists have yet to see the case for a sustained downturn and have generally advised clients to focus on longer-term recovery fundamentals.

Finance, healthcare, energy

Mark Hafele, chief investment officer of global wealth management at UBS, said in a note Monday that omicron is unlikely to justify a change in belief that the global economy is on a bumpy road to recovery and that growth will be sustainable.

“We do not advise you to hastily change your investment strategy and recommend continuing to invest. The market reaction could have been exacerbated by relatively low liquidity during Thanksgiving, and volatility could remain elevated in the coming days as investors systematically adjust their positions, ”Hefele said.

“The period of market volatility after such a strong rally shouldn’t come as a big surprise either. But it serves as a reminder of the value of diversification across markets and sectors. “

In terms of sectors, Haefele has a positive attitude towards financial and energy issues. He expects oil prices to remain high until 2021 and 2022, with the international benchmark Brent oil price reaching $ 90 a barrel by March.

“The financial sector was hit by the drop in profitability on Friday, but after a strong Q3. [third-quarter] In the reporting season, sector profits were boosted, and recent data from the European Central Bank indicate an increase in private sector lending, ”added Hefele.

Hefele also encouraged investors to look for opportunities in health stocks, which he argued offer “opportunities for both protection and growth.” He said the sector’s strategic outlook remains strong and valuations attractive after recent losses.

“In our opinion, it’s time to catch up. We believe this has become more likely as the uncertainty about drug prices in the US has been resolved, ”Hefele said.

UBS has increased access to alternatives such as private equity and hedge funds, which strategists believe are well placed to generate risk-adjusted returns in falling markets. Hefele also encouraged investors to look for “unconventional sources of income,” such as private loans or stocks with dividend payments.

Rollback time?

George Lagarias, chief economist at Mazars in London, said in a note Monday that while it’s hard to say if Friday’s pullback was an overreaction, the data suggests investors should wait before discussing a correction.

“Global stocks are already up nearly 21% year on year, and even if this event did not happen, it would not be the worst time for market participants to take some profit off the table,” Lagarias said.

With sufficient liquidity in the markets, he suggested that investors could try to take advantage of the lower valuation and get their money back on track. This trend appears to have surfaced in Europe and the US on Monday as markets rallied.

That view was echoed by Berenberg chief economist Holger Schmiding, who told investors Monday that the surge in uncertainty explained the markets’ reaction on Friday, but longer-term fundamentals of the recovery are more likely to be delayed rather than derailed.

Schmiding acknowledged that news flow could deteriorate before it gets better in the coming days, but said this is unlikely to fundamentally change the central bank’s approach to monetary tightening.

“As we have argued since mid-March 2020, the pandemic does not justify a dramatic and prolonged revaluation of the productive capacity of large economies in terms of overall stock price levels,” Schmiding said.

In short: we do not see Omicron as the reason for the continued bear market.