Investment strategy
November 28, 2021
3 mins

Revisiting portfolio strategies for the Omicron variant

November 28, 2021
3 mins
David Bailin
Chief Investment Officer and Global Head of Investments
Steven Wieting
Chief Investment Strategist & Chief Economist
SUMMARY

The identification of a new COVID variant (“Omicron”) drove global financial markets sharply lower on November 26. While Omicron will become the dominant COVID strain worldwide with material economic impacts, we do not expect it to become a pandemic within a pandemic.


  • It will take several weeks to understand the virulence, transmissibility and immunity-escaping profile of the variant. In our view, Omicron is more likely to become a serious public health issue, slowing the pace of economic recovery and reopening, but may fail to materially change the existing global health landscape. Our discussions with epidemiological experts suggest the former is more likely.
  • Markets moved rapidly, assuming Omicron represents a variant that could displace Delta as the dominant strain. Experts see a strong probability that current vaccines and boosters will prove less effective, but not wholly ineffective, in preventing infection. Treatments appear more likely to be effective in preventing hospitalizations and testing for the variant is already working well.
  • Over the course of the pandemic, economic activity has become less and less sensitive to each new wave of COVID, including the Delta variant. While we assume this underlying will hold, the most sensitive of activities – particularly international travel – seem sure to be setback meaningfully.
  • With greater international coordination, industry experience and government preparation, a significant new variant is highly unlikely to send the world economy into a new recession, but it will slow the path of recovery and extend supply shortages.
  • Prior to Omicron’s arrival, markets were repricing a transition in monetary policy to fight inflation unleashed by macro stimulus, supply disruptions and shortages of goods. Omicron will now slow this repricing. To an unknown extent, the period of negative real interest rates will be extended if a new wave of infections occurs.
  • The winter spread of the delta variant in Europe and the US even before Omicron’s arrival seemed underpriced in markets. As such, “reopening trades” were particularly hard hit on Friday with Global airlines falling 7.0% and crude oil posting a 12.8% daily decline, the largest drop since April 2020.
  • We do not believe that Friday’s market moves were an overreaction given the information in our possession. However, with so little knowledge of Omicron, setting market expectations for its future impact is, by nature, speculative. The sharp reaction Friday and a pattern of “diminishing shock value” may imply that half of the impact of a full new pandemic wave has already been priced in.

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This Special CIO Strategy Bulletin was prepared with care after consultation with several leading medical, epidemiological and financial experts. That said, there are material uncertainties about Omicron and its trajectory that will become clearer in the weeks ahead. The scenario presented herein assumes that Omicron triggers typical B and T cell immune responses to those who have had vaccines and/or prior exposure to Covid.