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Market Insights – November 29, 2021

Each week, our Investment team shares its market views with you.

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Essentials

Concerns about the new COVID-19 variant sparked panic on the markets late last week. This was no doubt exacerbated by lower trading volumes over the Thanksgiving holiday. The downtrend prompted a welcome decline in investor sentiment indexes, which are now back in neutral territory after reaching extremely bullish levels. 

The euro continues to lose ground against the Swiss franc. Investors are unsure whether the Swiss National Bank will try and rein in the franc at a time when financial markets have become more volatile. 

Several Asian countries – such as Viet Nam, the Philippines and Japan – have again tightened restrictions and put their reopening of the tourism sector on hold in an attempt to prevent another wave of infections. The impact should be relatively limited, however, as most of the region has been slow to reopen.

A crash course in the Greek alphabet

Governments and policymakers are not getting a moment’s respite from COVID-19. Authorities have already had to deal with the resurgence of the Delta variant in Europe, which could spread to the rest of the northern hemisphere as winter gradually sets in. On top of that, they are now having to manage a new variant, Omicron. It’s only just been discovered, so we don’t know much about it yet.

We do know that it was first reported in South Africa and has already spread across southern Africa. The South African authorities have said that it appears to be extremely infectious and may already have taken over from Delta as the dominant variant in the country. Up until now, Delta had managed to outrun previous variants, like Alpha, Beta and Gamma, to the point that it now accounts for more than 90% of COVID-19 cases worldwide. 

Scientists and doctors in South Africa are still very cautious about how virulent and dangerous the new variant might be. But they have said that, so far, most patients’ symptoms are relatively mild. What’s worrying the international scientific community is that the virus has mutated considerably from its original version and may be able to resist current vaccines, that is, until manufacturers can make the necessary adjustments.

Omicron has therefore dashed hopes that the pandemic would soon be brought to an end. The world will have to live with the virus for a while longer, and governments have learned that it’s better to react – at the risk of overreacting – as quickly as possible. That’s why so many urgent measures were brought in late last week to try and stem the spread of the new variant. 

Assuming Omicron does not lead to more widespread strict lockdowns, the impact on the global economy should be limited, except when it comes to certain sectors – such as tourism and leisure – that may not be able to fully reopen just yet. The main concern at present is still that some sectors could overheat, causing further supply bottlenecks and spiralling inflation.

If there is less visibility on the public health front, central banks may think twice before putting the brakes on and starting the process of normalising monetary policies. This uncertainty could threaten the end-of-year rally already under way on the stock markets. Despite the declines recorded late last week, it may still be worth locking in some of the solid gains made by global equities this year.

Europe – when will we be able to stop worrying about COVID-19 ?

European markets, and particularly tourism stocks, had not been expecting another wave of infections in Europe. The arrival of a more infectious variant, together with the new restrictions, mean that investors are now fearing the worst for this winter. We don’t yet have much information about Omicron. But we don’t think that growth will be affected to the same extent as in 2020, when we were in uncharted territory. We have gained a fair amount of experience since then, especially with the arrival of the Delta variant. 

What’s more, governments will continue to respond quickly, and recent statements about central banks’ flexibility have also been very reassuring. Lastly, consumers and companies have adapted their behaviour to the new situation, with the growing prevalence of online shopping and remote working. We are therefore maintaining our constructive stance on the eurozone’s prospects once winter has passed. Supply bottlenecks should gradually disappear, especially if demand dips slightly. 

On top of that, the EU’s massive rescue plan has finally been rolled out and will be a major driver of growth.  Although volatility is likely to remain over the short term, we are still bullish on European markets in the longer term. Buy opportunities are likely to arise, particularly on stocks linked to the economic reopening, such as those in the tourism and leisure sectors.

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