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Investment strategy
December 1, 2021
2 mins

Global economy’s sensitivities to COVID disruptions have diminished

December 1, 2021
2 mins
Steven Wieting
Chief Investment Strategist & Chief Economist

The emergence of the Omicron COVID-19 variant presents a considerable new uncertainty for the world economy and markets. However, the wider economy’s sensitivity to COVID disruptions has diminished through each infection wave and variant.

Therefore, on December 1, 2021, our Global Investment Committee kept its asset allocation unchanged with Global Equities 6% overweight. Fixed Income and cash remain 6% underweight.


We believe that unlike the emergence of the novel shock in early 2020, the public has learned to coexist with Covid restrictions, and the restrictions have been adapted to be less disruptive. With consumer goods demand outstripping supply, production, trade and employment globally are very unlikely to drop in the coming year.

Amid great immediate uncertainty, our base case view of Omicron is that it will spread to become a dominant global variant. Current vaccines are likely to provide somewhat reduced effectiveness against it. This health development could extend distortions to the economy such as increasing goods demand while sharply stemming a recovery in travel.

How does this affect the markets?

The labor market and broad supply recovery may be set back, boosting price pressures. At the same time, we see inflation moderating early in the new year as seasonal demand pressures ease. The 15% drop in the global petroleum price will help energy consumers in the near term.

While market dislocations related to Omicron are likely to last for mere months - similar to the Delta variant mid-year 2021 - the macroeconomic policy outlook has become significantly less supportive for markets. While Federal Reserve Chairman Powell has acknowledged new downside economic risks from Omicron, the Fed appears to be losing patience with stubbornly high inflation.

This is setting the stage for a faster pace of reduction in bond purchases in coming months unless economic risks increase significantly. Markets face a combination of a new Covid variant hitting in the winter months while macro policy easing fades and short-term political risks such as the passage of another debt ceiling increase. This could cause markets to be quite volatile over the turn-of-the year period.

Our consequent adjustments

With this in mind, we believe our portfolio adjustments over the course of 2021 have significantly reduced risk while maintaining exposure to sustainable return opportunities. Over the course of 2021, we’ve reduced risk assets from a peak overweight of 11% to +6 and taken fixed income from an 11% underweight to -5%.

Our latest change in October added an overweight in medium-duration US Treasuries and Investment Grade Corporates. We continue to look for market dislocations in Emerging Markets credit opportunistically, and we believe long-term returns are improving.

We’ve migrated equity holdings toward consistent dividend growers and healthcare from emerging markets and small cap shares. With overweights in higher quality large cap holdings focused on shareholder distributions, we see the potential for meeting or exceeding the absolute returns of broad markets in the coming year.


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