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Omicron: Markets are in a different place to Delta

By James Penny, UK chief investment officer, TAM Asset Management

While the Omicron variant is something to be concerned with, it doesn’t strike us as anything marginally different from the Delta sell-off we saw in the summer months which, despite being volatile at the time was simply a buying opportunity in the market.

When the VIX spiked up on Friday by more than 50% this was indeed eye popping, but a lot of what has happened in the last few years in the markets has also been eye popping, conversely it just seemed to fit into the overall 2021 narrative of strong markets with short, sharp bouts of extreme volatility concluding with the “buy the dip” mentality.

We think the main observation right now is markets need to see more data around the variant’s aggression and efficacy to existing vaccines in circulation before they can react in earnest. The absence of this specific virological data is largely responsible for immediate travel bans imposed on South Africa, much to their consternation, as well as the market recovering some, but not all of the losses incurred on Friday.

Despite this uncertainty there remains a strong TINA trade in play – “there is no alternative” (to buying equities). We don’t believe the arrival of a Covid-19 strain which may or may not be more virulent will be enough to derail this TINA theme into Christmas. Conversely the sell-off on Friday and slow (ish) recovery from the market today has let some of the air out of the blistering stock market rally which we would argue sets up December into January in a more positive light for investors to maintain their equity positions. This is with the strong caveat that these pockets of extreme volatility will remain common place as the market recovers its highs.

There is an argument that markets are in a different place to the summer when the Delta variant landed. This is primarily because central banks are further along the path to monetary tightening, as well as inflation now being realised as more permanent than many thought. Given this, the consensus is that central banks are almost certainly going to have to act to control it. These observations – which are now a given – were largely obfuscated in the summer months and could have some knock-on effect to how aggressive the “buy the dip” mentality is right now. We maintain the direction of travel is to continue to add to equity positions rather than run for the hills, but more on the depth of this positive sentiment will be uncovered on Friday when US job numbers for November are released and the virological blueprint of Omicron is laid out.

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