Omicron Impact on Global Finance in 2022

mabarsport.-The market volatility caused by Omicron is not expected to continue: We expect overseas markets to remain volatile in December 2021, with market transactions focused on the number of confirmed Omicron cases and the latest information on vaccines. At present, the market panic is mainly from the unknown, and in December and early 2022, global investors will better understand the speed of the spread of Omicron and the effectiveness of the vaccine on it, and with the introduction of the vaccine, the resilience of the global economy to the epidemic has been greatly enhanced, and we do not expect the recovery path to be significantly affected. In July 2021, when the Delta virus variant caused the latest round of epidemic panic, stock indices and oil prices fell sharply, bond yield curves flattened, and markets predicted that major central banks would reduce the number of rate hikes. However, within a week or so, the market impact caused by the Delta virus has almost completely subsided. We expect overseas markets to rebound after the December volatility has passed. The logic of upward inflation expectations in the global economy is not expected to change.



Compared to the Delta virus panic in July 2021, there are a few risks to watch out for:

1) The monetary and fiscal policy environment has changed. During the Delta panic in July, the Fed assured that policy rates will remain at 0%, and while rates remain in the same position for now, QE has started and accelerated in December. Accelerating the taper means that balance sheet drawdowns could end as early as March 2022, and rate hikes could start earlier.

2) The panic caused by the Omicron may differ from the Delta period. As this is already the second time the virus has had a higher mutation risk, investors may be inclined to believe that malicious variants of the virus will continue to emerge in the future, which may have some different effects on demand and market sentiment than before.

3) The effect of the Omicron variant on the health of the infected person may differ from that of the other variants previously. Omicron may be more infectious than previous viral variants, and as of November 30, data from South Africa showed that 10% of patients were infants under 2 years of age, suggesting that Omicron may have a greater impact on children and youth groups than the previous variant. , and the development of subsequent outbreaks remains uncertain due to low vaccination rates among adolescents.

It is not clear that Omicron will increase or decrease inflation risk: As China will stick to its zero-clearance policy, it could exacerbate existing global supply chain problems, thereby increasing inflationary pressures. But at the same time, if Omicron does have higher contagion and drug resistance, lockdown policies in Europe and the United States could continue to tighten, resulting in reduced demand and possible deflation. In addition, although the current consumer consumption in overseas economies is still relatively strong, the consumer sentiment index has begun to decline, and if the epidemic develops more than expected this winter, it may hit household consumption spending. Omicron's impact on inflation risk remains to be seen.

The pandemic has struggled to curb rising global inflation, and the risk of stagflation remains a subject: the focus of overseas investors has shifted to concerns about stagflation. in overseas markets, we have observed a significant upward trend in global short-term government bond yields and a decline in prices. The current increase in energy prices is a major source of inflationary pressures in many countries. but we have observed that inflation in overseas economies has begun to spread beyond energy commodities. Factors such as labor shortages, shipping bottlenecks, and port overcrowding caused by the outbreak of the epidemic return have caused manufacturing supply chain costs in global markets to increase significantly. if the worst-case epidemic scenario occurs, the global number of confirmed cases soars and overseas governments introduce more stringent epidemic prevention requirements, which could lead to a significantly lower than expected rate of economic growth, and the risk of stagflation will arise. In a supply pressure environment, we recommend selecting industries in foreign markets where future revenue growth is sustainable and supply chain costs can be controlled, and pay attention to valuations to avoid paying excessive premiums for non-deterministic profitable growth. it is advisable to pay attention to the pharmaceutical, internet, and real estate industries.

Risk Warning: Omicron has caused the number of confirmed global epidemic cases to exceed expectations, and epidemic prevention measures have increased, which has a negative impact on economic growth. High prices have been superimposed on economic growth, and the overseas economy has entered stagflation.

Will Omicron Derail The Global Economic Cycle?

Simply put, the answer is probably no, and see below to break down why. The rapid pace of change in the Omicron epidemic deserves everyone's attention, but there's no need to panic too much. The following describes what is currently known and even unknown, as well as the author's analysis of some of the potential impacts.

Omicron is a new variant of the novel coronavirus, which was first discovered in South Africa, and is widespread there, and has spread in several countries and territories at the time of this writing, including Botswana, Hong Kong, Europe and Israel. According to initial reports, most of the young patients have been identified so far, and most of these patients have not or have not completed vaccination (vaccination rate in South Africa is around 26%).1)。

According to our healthcare industry analysts, mRNA (messenger RNA) vaccines are best modified to protect against emerging COVID-19 variants. An mRNA vaccine against Omicron is expected to be available in just six weeks, but in terms of clinical testing, mass production and distribution, it could take up to six months even in mature market regions.

The three main problems surrounding Omicron strains are: first, the ability of the virus to spread; second, the severity of the disease; and third, vaccine efficacy. It is too early to say that conclusions are premature, but preliminary data reflect that the strain may have the basic characteristics of high transmission, and because of the current relatively small number of cases, its pathogenicity is difficult to assess, but the vaccine must have at least some degree of defensive effect. In the coming weeks, we should be able to get a clearer picture of Omicron's features above and beyond.

Another key question is: Will Omicron trigger a third large-scale outbreak? It's still hard to judge this, but it's a possibility. Of course, much depends on the answers to the first three questions. For example, if Omicron's condition is relatively mild and the existing vaccine can play a certain role, it will be different from the previous round of outbreak development, and the anti-epidemic strain of this variant could be dominant.

Macro Impact

The Omicron impact could reduce global economic activity to some extent, particularly in areas with the lowest vaccination rates and/or the most stringent epidemic prevention and control measures. However, I don't think this effect should last long, and can only affect economic growth for a quarter. Given rising vaccination rates, better surveillance systems, effective antiviral treatment and other factors, we may be cautiously optimistic that Omicron should not disrupt the current global cycle and cause a recession.

Inflation: A weaker business cycle could dampen global inflation on demand levels, but supply chain disruptions and worrying labor shortages have pushed up prices, which is likely to continue for the foreseeable future. The situation is more likely to worsen if concerns about Omicron heat up, forcing temporary economic controls or port closures. Given that Asia can barely afford the rise in COVID-19 cases, this risk is very much felt in the region. And most importantly, even if the economy slows down, supply-side-driven inflation is likely to persist.

Monetary Policy: Inflation caused by high supply, combined with weak demand, can pose a dilemma for central banks everywhere. There are two views in the market, where I agree that the authorities should tighten policy sooner than before or less aggressively (eg in December 2021), which is entirely positive for risk assets. Another view is that with inflation warming still lingering, Omicron may not change plans for central banks anywhere to tighten policy.

Fiscal Policy: The level of fiscal support underpinning the US government's Build Back Better program is likely to increase, which is expected to drive stronger GDP in 2022, while fiscal stimulus measures in Europe and Japan are likely to receive greater support.

Investment Implications

Lower/higher liquidity expected at year-end: as year-end approaches, liquidity in some market segments worldwide is expected to remain challenging, as may be the case with market volatility on the day after thanksgiving.

View volatility as an opportunity: for long-term investors, negative news and related market turbulence can present opportunities to increase holdings in cyclical categories such as tourism, leisure and hospitality, or gradually reduce their holdings of risky assets in growth categories such as technology.
review allocations for growth, recession, and inflation: is there an appropriate investment allocation for the hypothetical economic situation described above? Is the current spread of portfolio risk in line with the economic scenario you think might arise? consider how you can adapt your portfolio to possible future periods.

In the short term, expected growth stocks outperform value stocks, and the United States outperforms other markets: I expect that this market reaction will be consistent with the recent emergence of the Delta strain, and in the short term, growth categories will outperform dominant cycles and values, while the US market will generally outperform the rest of the world. Additionally, the dollar is expected to appreciate and bond yields hover around current levels. But from a longer-term perspective, the expected performance will be diametrically opposed: value stocks may outperform growth stocks, while other markets outperform the United States.

Factors to Consider

Among the many unknowns, the authors believe that the vaccine efficacy on the Omicron strain is the most important data to continue to pay attention to in the future, and believe that if the vaccine effectiveness is higher than 50%, it may imply that we can go further in terms of the rate of COVID-19 vaccination and injection booster, which is also conducive to economic recovery.

This is Omicron's Impact on Global Finance in 2022.

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