Weekly Brief: Omicron Has Left Global Investors Glancing Toward The Way Out

Weekly Brief: Omicron Has Left Global Investors Glancing Toward The Way Out

about 2 years ago3 mins

A new coronavirus variant – Omicron – has reared its ugly head, and it’s got investors the world over eyeing up the exit…

🕰 Recap

  • In March 2020, investors sold stocks off globally in response to the rising threat of coronavirus
  • But US stocks had recovered by July, turning in their best quarterly performance since 1998
  • Summer 2021 brought rising fears of the effects of the Delta variant, knocking US employment growth
  • And late last month, the new Omicron variant caused a dramatic stock market selloff

✍️ Connecting The Dots

Back in 2020, coronavirus seemed like it’d primarily cause supply disruptions: so many of the goods bought in the US and Europe are made across Asia that lockdowns threatened the delivery of components and products, resulting in weaker economic and company earnings growth. But it wasn’t long before that gave way to demand disruptions: the shutdown of all but essential businesses meant no one was around to buy products, whether or not they were being supplied.

The Omicron variant threatens more of the same. Supply, for its part, hasn’t fully recovered yet: just look at the record number of job vacancies, or the global shortage of microchips that’s hit everything from the car industry to smartphone makers. And demand looks set to take a tumble if people stay home to avoid getting sick, or if – as we saw in the US last summer – they refuse to take up jobs that require close contact with other people. The result will likely be weaker-than-expected economic and earnings growth.

But just like last year, it’s not all doom and gloom. Lower economic growth is a negative, all things equal, but things aren’t equal in this instance: lower demand could actually take the upward pressure off product prices and put an end to record-high inflation. And sure, stock markets could drop off even more, but previous lockdown winners could find themselves hot tickets once again. Take companies like Zoom and Peloton: the beneficiaries of enforced work-from-home and exercise-from-home trends could reverse their 40% and 70% declines this year, at least in part.

🔍 What’s The Opportunity Here?

1. Gold’s price could be about to get a boost.

If the pandemic gets worse – whether because of Omicron or another variant – the US dollar could fall in value, investors could turn against expensive-looking stocks, and central banks may look to increase economic support – a significant turnaround given the pressure that the US and UK are under to raise interest rates. And if investors shy away from other high-risk assets like cryptocurrencies, they could flock back to faithful old gold and push the precious metal’s price up.

2. Consumer staples stocks should outperform the US market.

Unlike consumer discretionary or “cyclical” stocks that tend to rise and fall with the level of economic activity, consumer staples stocks are less impacted by a slowdown since their everyday essentials are always in demand. Staples aren’t completely immune from a slowdown and their share prices are likely to fall, but by less than other stocks. And if you buy consumer staples stocks and simultaneously “short” the stock market, you’re betting on the outperformance of staples versus the rest of the market, which means you stand to gain if everything tumbles.

🎯 Also On Our Radar

Chinese ride-hailing giant Didi announced plans last week to delist its shares from the New York Stock Exchange and move them to the Hong Kong Stock Exchange. The company – whose stock has performed calamitously since its initial public offering, largely because of the Chinese government’s crackdown on the country’s tech companies – might be hoping to spare its investors any further pain by finally getting on its home country’s good side.

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