Written by Cormac Nevin.
Last week markets had a placid start, until Friday, when fears about the discovery of what was dubbed the “Omicron variant” of COVID-19 descended upon markets like a flock of thanksgiving turkeys. The MSCI All Country World Index of global equities dropped -2.4% in GBP terms on Friday, to end the week down -1.9%. Global Bonds, as measured by the Blomberg Global Aggregate Index, were up +0.1% GBP Hedged.
Omicron is the 15th letter of the Greek alphabet and, in a delicious irony, the sharp market selloff on Friday was exacerbated by the third letter of the Greek alphabet; Gamma. This is used to describe the phenomenon resulting from the widespread use of options to make highly leveraged bets on single stock names, particularly by retail traders on platforms like Robinhood. This causes a feedback loop whereby selling begets more selling by dealers and can result in sharp plunges like that which we have witnessed. The US Equity market is currently dominated by this activity, which explains much of the parabolic upside moves in names like Tesla and gives us slight cause for concern about having too much exposure to US Equities.
Events such as last Friday reinforce our conviction in our neutral equity positioning and diversified approach. MSCI Japan was down only -0.2% on Friday, as European and US markets sank – illustrating the opportunities various markets provide. While it is likely too early to say for sure, the Omicron selloff appears to be reversing. Countries are much better equipped to deal with new variants of COVID-19 than they were in the first wave, illustrated by the UK’s quick closure of travel from Southern Africa. In addition, companies like Moderna are already using their mRNA technology to synthesise Omicron-specific vaccines.
Given stretched valuations and the implicit leverage in certain markets, we think events like Friday may become more frequent. It will also likely be even more challenging for markets once central banks stop providing liquidity to an arguably overheating economy. A flexible and diversified approach will remain critical.