How Omicron Variant Could Affect Global Stock Markets in 2022
Omicron: Mongolia’s stock index would be the best-performing in the world in 2021, and a movie theatre chain would gain 13-fold, according to the average stock strategist a year ago.
While many were bullish, few foresaw the vigour with which the surge pushed European and American equities to new highs or the drop that followed the discovery of the omicron form of Covid-19. Even fewer had forecast China’s demise or the country’s developers’ financial problems.
In a nutshell, it was a year of surprises, which was the least shocking aspect of it all. It will be challenging to get the details right in 2022, but a few general themes are likely to endure.
Covid-19
Pandemic events have been the market’s main mover for nearly two years, causing a drop in 2020 and then a robust rally based on vaccination programmes, allowing the economy to reopen. Concerns about the omicron type have sent stock markets worldwide into a tailspin.
Most strategists believe that antiviral drugs from Pfizer Inc. and Merck & Co. will be added to humanity’s arsenal against the devastating epidemic next year. Despite warnings that the new strain might not respond to existing treatments, the majority opinion has not altered.
Even then, if the epidemic has taught us anything, it’s that equitable planning is one thing, and epidemiology is quite another. According to Romain Boscher, Fidelity International’s global head investment officer for equities, even if the virus becomes an endemic nuisance, the roller-coaster of restrictions to segregate sick persons “is evolving into a more chronic drag on growth.”
Even if the virus disappeared from our lives, the absence of fiscal and monetary stimulus, two key drivers of this year’s exuberance, would almost definitely dictate the stock market’s trajectory.
About Omicron
The virus that causes COVID-19, SARS-CoV-2, has a variant known as Omicron. As of December 2021, this is the most recent change. South Africa first reported it to the World Health Organization (WHO) on November 24, 2021. On November 26, 2021, the WHO called it “Omicron,” the fifteenth letter in the Greek alphabet, as a variation of worry.
The Omicron variant contains a variety of mutations, some of which are unique and a large number of which, at the time of its discovery, impaired the spike protein targeted by most COVID-19 vaccines. Even though early investigations showed, the variety produced less severe disease than previous strains, the high level of diversity has prompted concerns about its transmissibility, immune system evasion, and vaccine resistance. The variation was promptly labelled “of concern,” and numerous countries imposed travel restrictions in an attempt to slow its international spread.
Omicron is believed to be far more contagious (spreading much faster) than previous variants of concern, spreading around 70 times faster in the bronchi (lung airways). Still, it cannot penetrate deep lung tissue, which may explain why there is a significant reduction in the risk of severe disease requiring hospitalization. However, because of the virus’s fast rate of spread and capacity to resist both double vaccination and the immune system, the overall number of patients requiring hospital care at any given moment remains a significant worry.
The new variation was discovered for the first time on November 22, 2021, in Botswana and South Africa laboratories, using samples taken between November 11 and 16. On November 8, the first known sample was born in South Africa. An individual arriving in Hong Kong from South Africa via Qatar on November 11, and another coming in Belgium from Egypt via Turkey on the same date, were the first known incidents on other continents. The variation has been confirmed in over 80 countries as of December 16, 2021. Omicron was likely in most nations by mid-December, according to the World Health Organization, whether or not it had been detected.
Inflation
This year, the market’s focus was on rising prices, and for a good reason: soaring corporate earnings indicated that businesses could pass on higher costs to a willing customer.
If inflationary pressures ease in the following months, expect a relief rally, as markets have already priced it in. In a note, Goldman Sachs Group Inc. strategists Dominic Wilson and Vickie Chang wrote, “The market may not get to eat its temporary inflation cake again in 2022.”
Things could get complicated if price pressures persist or even worsen. Stocks are only a good inflation hedge up to a certain degree, according to Oddo BHF, WallachBeth Capital, and Lombard Odier, which is between 3% and 5%. According to Florian Ielpo, head of the macro and multi-asset at Lombard Odier, sustained a price increase above 4% would erode profit and hurt equities.
Inflationary pressures would also compel central banks to tighten policy, boost borrowing costs, and drain market liquidity for severely indebted countries like Italy. The first blood was drawn this week when Federal Reserve Chairman Jerome Powell issued a warning about the possibility of rapid asset purchase tapering.
According to Morgan Stanley’s Graham Secker, one of the most significant adverse risks for next year is the impact of the European Central Bank’s possible tapering on peripheral European debt. At the same time, JPMorgan Chase & Co. strategists singled out a hawkish turn by central banks as the critical downside risk to their bullish outlook.
Decarbonization
One reason inflation may remain structurally higher is the shift to climate neutrality, which the world’s top economies — from the United States to India — agreed to this year. Carbon prices and environmental taxes are increasing the cost of industrial output. Simultaneously, a lack of investment in fossil fuels has resulted in increased energy costs that threaten to limit growth and disrupt productivity.
Decarbonization, on the other hand, according to asset managers such as BlackRock Inc. and Nuveen, presents unprecedented investment prospects. For instance, look no further than electric vehicles: The stock of Tesla Inc. has increased more than 1,000 per cent since the beginning of last year, while Rivian Automotive Inc.’s market value quickly rose to more than $100 billion after its initial public offering last month, even though its sales are non-existent.
After falls this year for companies like Siemens Gamesa Renewable Energy SA and Vestas Wind Systems A/S, decarbonization stocks may get a boost now that the Green party is in power in Europe’s largest economy.
The Metaverse
Facebook’s rebranding drew attention to a burgeoning realm of economic activity outside of the physical world, from social media to gaming platforms. Nvidia Corp., a chipmaker, and Roblox Corp., a video-game firm, are just two of the stocks that have risen sharply since Mark Zuckerberg rebranded the company he co-founded as Meta Platforms Inc.
According to Epic Games Inc. Chief Executive Officer Tim Sweeney, the metaverse — digital realms where users may communicate, play games, and do business — is a multi-trillion dollar possibility.
A digital Gucci purse, which can only be used in a gaming platform universe, can already be more expensive than the genuine one. According to Morgan Stanley, individuals in the developed world increasingly spend more time online than in physical settings. While the trend surged during the pandemic with stay-at-home orders, it is expected to continue in the years ahead, with Apple Inc. joining the fray.
China
This year, Beijing enacted draconian steps to limit the profits of IT behemoths and teaching corporations and financing curbs on real estate developers to reduce its reliance on the sector. At the same time, rising factory-gate prices have made it difficult for businesses to sustain profit margins. In contrast, the country’s central bank’s absence of meaningful easing measures in recent months has slowed economic growth.
Hong Kong’s offshore Chinese stocks have been among the worst performers globally this year, with the Nasdaq Golden Dragon China Index down more than 50% from its February high. Compared to global stocks, the MSCI China Index is near its lowest level since 2006.
Despite this, many foreign institutions are becoming increasingly bullish on Chinese stocks.
At a critical economic meeting this month, BlackRock expects Beijing to alter its policies toward real estate developers and help the private sector. At the same time, BNP Paribas forecasts Beijing will adjust its policies toward real estate developers and support the private sector.
In a November 23 briefing, BlackRock portfolio manager Lucy Liu remarked, “We believe the timing to the position is right now.”
Goldman Sachs is excited by the investment potential linked with President Xi Jinping’s “shared prosperity” initiative, such as renewable energy. According to UBS Group AG, Tighter rules have been priced in, but corporate earnings and values are expected to grow.
There’s Still More…
Staying on top of these developments will not ensure significant gains for investors. Potential black or white swan events abound, from the US midterm elections to the French presidential race, from tensions in Taiwan to a full-blown economic catastrophe in Turkey as the currency depreciates. Supply chain bottlenecks will be closely monitored, and traders may have to factor in global warming as a potential stumbling block.
It’s no surprise, then, that the world’s most prominent strategists can’t agree on the direction of equity markets. While HSBC Holdings Plc’s Max Kettner advises investors to start selling stocks in the first half of next year and sees things improving in the second half, UBS Global Wealth Management predicts the exact opposite: a strong start followed by a deteriorating outlook in the second half.
While Goldman Sachs expects markets to rise steadily next year, Bank of America Corp. is more gloomy, forecasting low or negative, and undoubtedly volatile, returns in 2022.
And if 2021 has taught us anything, it’s that focusing solely on the fundamentals of the companies in which you invest isn’t always the best strategy. Some retail investors gained a lot of money last year by rejecting such principles, with AMC Entertainment Holdings up over 1,200 per cent and GameStop Corp. up more than 800 per cent for no apparent reason other than a social-media-fueled enthusiasm.
Goldman Sachs encourages investors to be careful in the future, avoiding companies with high labour expenses and equities solely based on long-term growth projections. But then again, strategists said the same thing last year.
Edited and proofread by Ashlyn
