Should Investors Be Worried About The New Omicron Variant?

Monday, 13 December 2021, 9:08 am
Press Release: Kalkine

Summary

• Financial markets could see some effect of the Omicron variant as the virus spreads internationally.
• Previous experiences have shown that the market does not respond well to disappointing virus-related news.
• Despite the ongoing volatility in stock markets, investors should refrain from jumping out of the market in panic.

The financial markets are once again experiencing virus-related disruptions amidst the recent outbreak of the Omicron variant. Ever since the pandemic ensued, instability in markets has become part and parcel of daily life. The stock markets have been witnessing immense volatility ever since the Omicron variant came into the limelight. What followed was a large-scale exit of investors from the market for some time, which resulted in stock market sell-off across the globe.

The World Health Organisation (WHO) has deemed the new variant as a high-risk virus that is likely to spread internationally. Essentially, this would mean financial markets across the globe could see some effect of the Omicron variant as the virus spreads.

The reason why stock markets remain under great danger is that many investors are still suffering from COVID-related fatigue and have developed a lower tolerance for risky ventures. Thus, even as economies are finally emerging from intermittent lockdowns, the dampened risk-taking capacity is likely to be a key factor driving investor sentiment.

GOOD READ: Omicron’s spread: How severely can it impact global recovery?

Taking cues from the past

It would be safe to assume that the collective sell-off recently observed in the stock markets is a consequence of investors acting preemptively. Prior experiences have shown that the market does not respond well to disappointing virus-related news. In the past, the first wave of COVID-19 created a sizeable dent in the trading volumes, causing a mass scare among investors.

Equity markets observed a massive crash in March 2020, when the WHO declared COVID-19 as the official pandemic. However, certain stocks delivered higher-than-average returns in subsequent periods while becoming investors’ favourites within a short period.

The favouritism was closely tied to stocks that surged in tandem with the changing degree of the virus spread. For instance, healthcare stocks performed exceptionally well during the first few months of the first wave but gradually showed a slowdown. During the pandemic, investors were primarily seen to be turning to safe bets, such as dividend or blue-chip stocks, at beaten-down prices.

A similar pattern could be seen in stock markets in case the Omicron variant turned out to be a riskier mutation of the COVID-19 virus. Recently, the NZ share market witnessed a sharp fall amidst investors’ concerns around the potential impact of the new COVID-19 variant. While the market managed to recover after a few days, experts remain worried if Omicron fears would build up into a longer-term decline in investor sentiment.

Too early to react?

Formulating market predictions at this point would be like a wild shot in the dark. Market forces have turned out to be highly sensitive to the virus. Meanwhile, investors could find themselves in a state of little to no knowledge about the possible magnitude of the spread and intensity of the virus. After witnessing the previous strain’s disruption, investors are most likely to tread cautiously this time. However, it would take weeks before the true impact of the new virus strain is realised.

With most of the firms operating under a strenuous setting of supply-side disruptions, the new virus (if riskier) could cause more disruption this time. Supply constraints have already affected the profits and stock market gains of many companies during the pandemic.

Meanwhile, one cannot neglect the residual Delta variant cases, which continue to pose a risk to the efficiency of the economy. In a way, the markets are facing pressures from all directions, making it hard to distinguish how much of an effect the Omicron variant has had on them.

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However, investors should think twice before jumping out of the market in panic. Instead, a good idea is to consistently maintain the ongoing investments and keep a handful of safe assets tucked into the portfolio. Moreover, a further fall in share prices could unfurl a window of opportunity to invest in the high-grade stocks trading at a bargain and enjoy lucrative gains when the market eventually recovers.

In a nutshell, investors can simply choose to observe the ongoing market trends instead of investing aggressively. For now, investors can develop a long-term strategy and avoid making emotional decisions due to short-term price movements. Meanwhile, investing in quality stocks could most likely end up being a fruitful investment when the market corrects itself. The best option at hand is to keep investing, albeit carefully, while refraining from panic buying or selling.

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