In late November, the emergence of a new COVID-19 variant spooked financial markets. Despite the chaos, our Chief Investment Office maintained a mild overweight to risk assets this month. Find out why in our latest House View.
November was looking like a relatively benign month for financial markets.
A fourth COVID-19 wave across Europe, the commencement of tapering in the US and the reappointment of Jerome Powell as Chair of the US Federal Reserve (Fed) all had the potential to roil markets. The coming and going of the 26th United Nations Climate Change Conference could also have bought disruption. Despite this, until the afternoon of Friday 26 November, markets had shown little signs of concern.
The Chicago Board Options Exchange's Volatility Index, or as it is more colloquially known, the VIX, had only risen 14% over the month; the MSCI World Index less than 1% and bond markets had behaved in a far more orderly fashion than the two months prior.
Enter B.1.1.529, or as it has since been renamed by the World Health Organisation (WHO), Omicron - the latest in a growing line of Greek letters used to describe variants of COVID-19.
Since designated as the newest variant of concern, Omicron, which was first reported in South Africa, shattered the calm as concerns rose about a significant stalling of the global reopening. International borders began snapping shut, the price of oil fell more than 10% - one of its biggest one day declines on record - and the Dow Jones Industrial Average finished 2.5% lower, its worst one day fall since October last year, as investors sold first and sought to ask questions later.
Stocks which have recently benefitted from the reopening trade were hardest hit as a rotation back towards the ‘stay at home’ theme took hold. Locally, Qantas shed more than 5%, while globally, travel and retail related shares fell sharply; this included Royal Caribbean Cruises and Unibail-Rodamco-Westfield - each falling more than 10%. Conversely, Zoom and HelloFresh rose approximately 5% while healthcare companies also benefitted - Moderna jumping more than 20% on the news. Potentially exacerbating the movements was the US Thanksgiving holiday, where traditionally thinner volumes of shares are traded than on average. Thinner volumes tend to result in more extreme swings as there are less traders available to take sell orders. On 26 November, fewer than 9 billion shares were traded on US exchanges, a stark contrast to the almost 11 billion traded on average. Bond markets weren’t immune to the panic, as investors sought a flight to safety, the yield on the US 10-year Treasury falling to 1.48%.
So far it is too early to tell what impact this latest variant will have on the global reopening and economies more broadly. Medical experts have called for calm in the face of rising fears, noting the globe is far better positioned to deal with a renewed crisis than it was 18 months ago. Vaccine technologies have advanced since the start of the pandemic, with proven rapid adaptability. Further, large parts of populations, at least amongst developed nations have high vaccination rates and central banks and governments have proven they are willing to backstop economies and financial markets, albeit their ammunition levels have now been severely depleted. This latest episode will provide further food for thought for central banks currently mulling over the potential unwind of policy measures.
This latest episode does serve as a reminder of the vaccine disparity - some commentators are labelling it a vaccine apartheid - between developed and underdeveloped nations and how important it is that all populations are inoculated. The latest variant is believed to have developed in a country where low vaccination rates and high levels of HIV (where immune systems are already weakened) result in a breeding ground rife for new variants. Until such time as this disparity is addressed the global economy remains vulnerable to further shocks.
What this means for our diversified portfolios
Until we get clearer signals for change, we remain mildly overweight risk assets, with no immediate plans to adjust portfolios because of the Omicron variant. Throughout the pandemic we have seen numerous examples of markets reacting swiftly to news, only to unwind the changes days later. No better example than in early 2020 when we saw the steepest bear market in history swiftly followed by the sharpest bull market recovery on record.
We continue to advocate for a long-term investment strategy and despite our mild overweight to growth assets, the diversified nature of our portfolios allows us to maintain some defensive positions which aid in downside protection during moments of extreme market movement.
We retain a very mild overweight to the USD and slight underweight to the AUD; the positioning serving as a form of protection during market sell-offs. Additionally, we maintain a mild overweight to unhedged global equities and mild underweight to Australian shares. This relative positioning and favouring of defensive/quality stocks versus cyclical shares should provide some benefit to portfolios. Finally, despite a mild underweight to duration, portfolios still hold significant duration exposure, which alongside our mild overweight to cash, should provide downside protection during this time.
ANZ investment strategy positions - December
*Percentage of developed market and emerging market equities hedged from foreign currency into Australian dollars.
Tactical Asset Allocation is current as at 1 December 2021.