The investment markets are a far more rational environment. The one thing they can do is analyse all the available information in more detail than any media corporation can possibly do and reach a rational conclusion without sensationalist or political distortion. The global equity markets sold off by around 5% (Source FE Analytics, Dec 2021) when the Omicron variant was first discovered, and the world’s scientists and politicians started reacting. Since then, we have lurched from down days to up days, hovering at a level that is slightly above that first fall as the news flow around the world ebbs and flows in an all too familiar way as restrictions reappear.
People have become very distrustful of politicians who deliver the information. However, what we can be certain of is that this variant is many times more transmissible, and we all know of more infected people this time around than previously. However, no-one yet knows how deadly it is and it would be a brave politician who made any claims that we should not be concerned. The scientific experts have always erred on the side of caution and who wouldn’t when they are only tasked with protecting the population, not the economy. Some may remember the Michael Fish weather moment when he told us not to worry about reports of an impending hurricane, which then arrived causing devastation.
This human behavioural bias to protect yourself when making predictions transcends into the markets when commentators are asked how they feel about the future. Few will be openly bullish for fear of looking very silly. The phrase ‘cautiously optimistic’ is often used as it covers both bases with sufficient wriggle room for either outcome. Investing is an activity of forecasting the longer-term future whilst the short-term is impossible to predict, especially when there is a viral influence circulating at exponential speed.
One crumb of comfort we can consume is that investors are currently generally holding their nerve. Yes, there is obvious volatility in the directly challenged businesses such as airlines, hospitality, and leisure but the overall markets are holding up well because we have been here before and the shock factor is no longer a new so-called black swan event. If omicron was far more deadly, then that would be a major new development, especially as lockdowns are being largely avoided at the time of writing. It is a measure of the public’s Covid restrictions fatigue that many are prepared to take risks in terms of socialising that they wouldn’t have dreamt of in March 2020 even when that variant was far less contagious. Nothing spreads panic like an unknown risk as speculation runs wild. This time around we know a lot more, know how to prevent the spread and know that there are vaccines available or that can be created, given time.
The markets are hoping that this fourth wave will possibly be the last, with the variant’s 30 or so mutations taking Covid to a point of relative harmlessness much more quickly. However, with this, is an assumption that hospitalisations, deaths, and the economic damage will be far less, hence the equity market complacency. We must hope that this time, when statistically we know that markets are usually right, this time they genuinely are.
Reasons to be cheerful are numerous in number and have been somewhat overshadowed recently. Themes are ever popular which include energy efficiency, electric cars, hydrogen fuel cells, renewable energy and the huge shift to home working brought about by the pandemic. The pandemic has brought forward the adoption of technology by many years – the office as a principal place of work is already history. This will shape investment opportunity in the future far more so than the pandemic – investors would be wise to remember that and be cheerful for 2022.
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