Investment Commentary – December 2021

2 minute read

The reports of the recently named Omicron variant discovered in South Africa and rapid detection of its spread to Asia and Europe have quickly turned market sentiment, which up until the final few days of the month was cautiously optimistic. While it is still early days and little is known of the true danger of this variant, the number of mutations and reports that it is more transmissible has caused alarm. Furthermore, rapid government action was seen globally, particularly towards international travel. Israel and Japan were among the most extreme examples, where most international travel was banned. The potential economic impact from this new variant will predominately depend on the level of government action. Decisions over the coming days will therefore be closely watched.


Underneath the headline equity index moves, which saw aggressive 2-4% moves on Friday 26th, there was significant dispersion in stock performances. Unsurprisingly, airlines and companies connected to international travel were hardest hit, followed by leisure stocks. Conversely, healthcare shares, particularly those connected to vaccine manufacture performed well. As more is learned about this new variant, there is likely to be significant volatility as investors attempt to reflect the impact. While there is clearly a notable downside scenario, it is also important to consider that this variant may be less harmful than others, and any market moves could be swiftly reversed.


Outside of equities, fixed income markets also tried to price in this new risk. Resultingly, bonds yields fell, particularly at the short end, reflecting the expectation that flagged interest rate rises will be postponed. The potential impact to longer term growth and a flight to safety also caused longer dated bond yields to fall. The upcoming Bank of England meeting in December, where the market was expecting a rate rise to be announced, will now be in the spotlight. The balance in favour of a rate rise was already narrow and the addition of new restrictions that may impact economic growth could swing the committee back towards holding rates steady at the historic low of 0.1%.


Having fallen from the top of many investors list of concerns over the last several months, COVID is now clearly the main driver once more as scientists, governments and investors digest the data on the latest variant of concern. Unfortunately, many of the major themes previously in place, namely inflation, tightening monetary policy and economic recovery, will have their paths directed by this new variant.