The big talking point over the past week has been Omicron – the name given to the latest strain of Covid. The variant, which sounds like the latest character in the Transformers or Marvel franchises, has had a huge impact on markets and investors.
In November, investors were cautious as the latest coronavirus concern hit, as Eve Maddock-Jones wrote. Both funds and investment trusts were impacted, with the best and worst sectors reflecting the change in sentiment.
Gary Jackson wrote that there were three key questions that investors needed answered: is it more contagious than Delta, is it more dangerous and how effective are the vaccines?
One area not looked at, however, is the impact it will have on interest rates – everybody’s favourite economic topic. Investors had priced in a rate hike by the Bank of England before Christmas, despite governor Andrew Bailey’s willingness to say one thing and do another.
Indeed, after strongly hinting the Bank would raise rates in October, it kept them at their current levels, with some calling him the new ‘unreliable boyfriend’.
However, with the outbreak new variant this has proven to be a sensible decision and some now believe the first rate hike has been pushed back to next year.
Laith Khalaf, head of investment analysis at AJ Bell, said it had “punctured expectations”, with February now the “frontrunner to stage the much-anticipated tightening”.
This implies that investors view this latest variant as a setback rather than something more serious, with “considerable optimism” that it is just a “stumbling block”.
Indeed, the BlackRock Investment Institute remains positive on stocks – for now – as there was no evidence yet that the new variant could not be combatted by the vaccine.
In the short term, alternative assets can provide some protection. If the variant is worse than feared, gold should rally as the safe haven would benefit from investor panic. Similarly, tech stocks should bounce as the lack of a rate hike, coupled with their ability to thrive during lockdowns, will encourage investors to pay up for them.
Bonds should also do well, although with interest rates so low, and therefore yields also in the tank, it is more a hope for capital appreciation than the steady income that one would normally rely on.
Of course, if it all blows over, the opposite will be true. Value stocks will continue to recover as the markets price in rate rises and the reopening/rebound of the global economy.
“Announcements from governments and pharma companies in the coming days and weeks will take centre stage in market pricing,” Khalaf said.
As always, however, there is also the option to do nothing, sit back and watch it all play out – rather than betting the farm on one outcome or the other.