Blain’s Morning Porridge 29th 2021 – Omicron Hits Markets, and Spells Opportunity!
“When all around are losing their heads..”
This morning: The Omicron Variant dominates the headlines, but will likely prove a short-term market factor. No doubt a renewed round of panicked responses, lockdowns, travel bans and Christmas threats will occur, but markets should take these in their stride – the biggest risk is margin calls triggering something deeper.
So many things to think about this week:
- The New Covid: I thought Omicron was a Doctor Who villain…?
- The New Germany: What might the new traffic light government mean for Europe..?
- The New Market: What will generate Alpha returns in a post-equity market?
- The New Turkey: Lessons to be learnt across the globe
- The European Weather Outlook: Just how bad is the shortage of gas likely to prove?
- And, all the same old stuff like ESG excesses, bitcoin thinking, etc etc..
I will try to get to all these topics at some stage this week.. and if I don’t, just email or call me for a swift brain dump… The problem is finding time to scribble down my thoughts!
This morning, Omicron – or should I say B.1.1.529 – is getting all the attention. How I would have giggled if they’d name it Xi! (Which, apparently nearly happened..)
Last week the market assumed the worst: a vaccine-dodging, more-infectious, less-traceable, super-fast, doubleplusbad dangerously deadly variant about that is about to scupper economic recovery, and pull down financial markets burdened by $1 trillion of leverage and long to the ying-yang on wrong-side options. (What was very satisfying was the concurrent risk-off rally in Treasuries, exactly as I predicted would happen in crisis a few weeks ago.)
We can see the result in markets, the panicked reaction by certain governments, and the fact the evil corrupt politically connected b******s who’ve managed to grab the Covid Testing monopolies here in the UK are hiking their prices…
Whoa. The Omicron crash is about unsubstantiated fear. None of the Omicron worries are facts. (Yet…..)
Last week’s market tumble on the new Covid variant highlights just how fraxious and nervous markets are. With the media tripping over itself to scare us over Covid and turning every scratch into a life threatening sepsis case, concerns about how massively overpriced the market is(*), geopolitical uncertainty, bad news already in the air with new European lockdowns announced last week, and suddenly every player looking for the excuse to sell ahead of the pack decided to run. It’s no surprise there was a rush for the exit door, during a US holiday shortened thin trading week.
There are bound to be further supply chain problems as nations again WFH and borders close. It’s happening already… but remember Blain’s Market Mantra no 6: “Things are never as bad as you think they are, but seldom as good as you hope..”
The question – is it the end of the Covid rally that’s been running since March 2020? Probably not. All the conditions to sustain it remain in place: the expectation of economies reopening, ultra-low rates, supportive Central Banks, and governments willing to print to avoid meltdown. One leading investment bank said: “This mutation is unlikely to be more malicous; there is no reason for portfolio changes.”
Let’s wait and see if they are right. Cheap stocks are cheap stocks. Buy ’em while they are!
On the downside, there are reasons to be concerned. The consequences clearly arising from what Covid has done to the global economy are significant. Supply chain disruption may be temporary, but it has triggered long-term cost-push and wage inflation. Over the next few years I think we will be surprised at just how much its changed society and the way we approach work – but these are all medium term effects. Will we ever fly the way we used to? Covid and Climate Change together may change more than we expect.
In the short-term I have a couple of reasons to be positive.
The first is the virus itself. Back in October I warned about renewed Covid effects on the market, and how it’s not going away anytime soon: “Covid Multiplies the Economic Threat.” The bottom line is the new variant confirms Covid is likely to remain a long-term source and threat of destabilisation in markets and economies. Get used to it.
We should be concerned, but not in the least surprised by a new, more virulent mutation of the virus. The goal of any virus is to survive and thrive – which means it constantly mutates to become optimal. To be successful, the optimal path for a mutating virus does not mean becoming more dangerous – less lethal is better for us and the virus! The less harm it does, the easier it reproduces, and more successful it becomes. This one may well be more infectious (a genetic win for the virus), but over the weekend the South Africans were on the wires saying cases are generally mild.
The peculiar mutations on the Omicron virus spike protein (which apparently build on the Delta mutations) are cited as the reason this new variant is more infectious and will become the dominant version of the virus. However, apparently it can still be identified by current PCR and Lateral Flow tests, and there is no published evidence yet its more deadly. Interesting this mutation also comes from a developing nation – confirming fears the virus is blooming where vaccination rates are low.
There is a risk its increased transmission comes with other mutations creating greater lethality, but for all the ballyhoo about immediate lockdowns, renewed travel sieges, mask wearing, and the need to vaccinate the unvaccinated – we really don’t know if this variant is more dangerous or not, or if the 80% of Brits and other westerners already double vaccinated are suddenly at risk again.
Over the next few days we’ll learn more. Whatever the outcome, all the anecdotal evidence coming out of hospitals suggests it’s the unvaccinated who are taking up hospital beds. That’s likely to remain the case.
My second area to be positive on is markets. We’ve quickly learnt to see past the headlines and trade on the support given to markets. Every previous virus spike – like Delta during the summer, produced a sharp downturn that was reversed in days. I’m going to hazard a guess that markets will post a swift recovery this week. New record levels anyone?
What is of more concern is some of the fundamental weaknesses thrown up by this Covid spike. Its exposing the frailty of markets fuelled by margin (nearly $1 trillion according to one report I saw), and the levels at which retail investors have gone all-in. If they have to pull back, then that’s a lot of froth out the game – meaning cheap stocks will be cheaper for anyone with the wherewithal still to play.
Next few weeks will remain interesting in terms of opportunities!
Five Things to Read This Morning
Out of time, and back to the day job…
Strategist, Shard Capital