How is the Omicron Covid-19 variant impacting the financial sector?

Following the emergence of the new Omicron coronavirus variant, the UK government has introduced a new series of restrictions on the public.

The Prime Minister Boris Johnson confirmed new temporary and precautionary measures following the emergence of the variant earlier this month.

The Omicron variant contains a large number of spike protein mutations as well as mutations in other parts of the viral genome. Early indications suggest this variant may be more transmissible than the Delta variant and current vaccines may be less effective against it. A rapid rise in infections in South Africa has been attributed to the spread of this new variant of COVID-19.

The new measure include; all international arrivals must take a Day 2 PCR test and self-isolate until they receive a negative result; all contacts of suspected Omicron cases must self-isolate, regardless of their vaccination status (they will be contacted by NHS Test and Trace); and face coverings will be made compulsory in shops and on public transport from next week (all hospitality settings will be exempt).

To understand the wider impact of the new variant, Business Leader spoke to some leading financial sector experts to see how this latest development could affect the industry.

Winning and Losing Stocks If Covid Returns

The COVID-19 pandemic never entirely went away. However, across the globe, many countries loosened travel bans and work from home orders and set off on a path toward recovery. The new Omicron variant threatens this return to normal, with experts suggesting it could plunge world economies back into chaos. If COVID-19 returns, which stocks will win and which stocks will lose? Alpesh Patel OBE shares his thoughts.

WINNERS:

Stay At Home Stocks

While the pandemic hit world economies hard, plenty of stocks were well-positioned to take advantage of this new normal. So, we should see a repeat of this if there are further lockdowns. Two companies that could benefit from the return of COVID-19 are Peloton and Zoom.

Peloton, THE home exercise bike, saw a spike in late November, while video-conferencing app Zoom also gained traction during the same time. Other stay-at-home equities that could benefit from brick-and-mortar business closures are Deliveroo and Just Eat. Likewise, if everyone is locked indoors, streaming services like Netflix could gain more subscriptions.

Tech Stocks

Last time around, tech stocks were the big winners of the pandemic. Remote working became the norm in many industries, and the tools that made it possible triumphed. Cloud computing, video conferencing, SaaS, and cybersecurity were just some of the big winners. History is likely to repeat itself.

Consumer Discretionary

Consumer discretionary services were another big winner during the last lockdown. Amazon has had a bumpy year, but it’s still up 8% year to date. eCommerce and clothing shops like Footlocker and eBay also look possible.

Intangible Assets

Intangible assets — like patents, technology, research, and copyrights — all performed well during the last lockdown. Indeed, the research is reasonably compelling. With supply chain issues haunting the production of physical goods, more abstract services seemed to have an edge throughout 2020.

Pharmaceuticals

If the world shifts back to dealing with a public health crisis, it can only be good news for pharmaceutical companies. Pfizer’s free cash flow doubled to $29 billion on the back of its COVID-19 vaccine. Expect a strong performance if new variants rear their head. Moderna is another equity that will go the same way.

LOSERS:

When lockdowns were announced in Austria recently, the international community took notice. Indeed, some of the equities that had benefited most from reopening took a tumble. Travel bans and stay-at-home orders would hit an already ailing hospitality sector.

The stock market dip at the end of November foreshadowed what could happen if a new strain broke out once more.

Hospitality & Airline Stocks

After the Austria announcement, airlines were the first to dip. Boeing dropped 5.7%, with United Airlines (2.7%) and Delta (1%) falling too. All this came only a week after the US announced a loosening of travel restrictions into the country.

The picture was just as bleak for the FTSE 100. IAG, who own British Airlines, and cruise line Carnival were both down over 10%. Tui, EasyJet, and Wizz Air also suffered significant losses.

Omicron is terrible news for the hospitality sector too. Airbnb shares shed 3.8%, with Expedia losing almost 10% of its value. The biggest losers were Royal Caribbean Cruises, with a drop of 13.2%.

Ride-sharing Apps

More lockdown orders could harm tourism, nightlife, and office work. These three areas are important revenue sources for many popular ride-sharing apps. Indeed, shares in Lyft and Uber dropped 3% as the market felt the tremors of a new variant.

Energy

Last time out, the Energy sector was hit hard by COVID-19, with shares dropping by 20%. The pandemic’s travel restrictions reduced oil demand, which had a knock-on effect on production, refining, and other businesses that supply equipment to industry.

November’s big sell-off saw several S&P 500 Energy companies suffer. Laredo Petroleum and Callon Petroleum, alongside the industrial Triumph, all shed 10% of their value.

Summary

Pandemic fears in late November hit the stock markets hard. The Dow Jones Industrial Average dropped by 900 points as investors had COVID-19 deja vu. However, it seemed like a short-term shock. The green shoots of recovery soon emerged, with sentiment in London and Europe turning positive.

If this was a dress rehearsal for a future COVID scare, the last few weeks might have demonstrated the resilience and quick recovery of the market. With vaccines available and business continuity in place, the markets seem to suggest that they could take another pandemic in their stride.

The last time out was unprecedented, and no one was prepared. If COVID-19 returns, global economies should be ready.

Oh no, not another one

Mark Sevier, Senior Investment Research Analyst at Alpha Portfolio Management shares his thoughts on the impact the latest Covid-19 variant has had on the nation’s financial markets.

We are beginning to fear hearing references to the Greek alphabet. Just as we all thought we had got a grip on ‘Delta’ and life was starting to return to some sort of normality, along comes ‘Omicron’. However, we appear to have leapt forward – Nu has been missed as it sounds like a ‘new’ virus while Xi was presumably not chosen to avoid upsetting China’s leader. So hence we arrive at Omicron!

From a business and personal perspective, we hate the uncertainty that this news brings. We only know a little at the moment – Omicron is more infectious and current vaccines are likely to be less effective than against Delta.  However, South African scientists have reportedly described the symptoms as relatively mild. It will probably take three weeks or so before pharmaceutical companies are able to tell us how effective their vaccines are against Omicron. Vaccines may need to be tweaked or new ones developed which will take time. Until then governments are left with existing measures such as travel restrictions, mask wearing, self-isolation etc. Nobody wants and business can’t afford another lockdown, so we have to hope accelerating the booster jab programme and the current measures are enough to restrict serious illness and pressure on the health service. UK businesses must be hoping we do not see another ‘ping-demic’, given staff shortages that already exist.

Christmas is coming, the goose is getting fat……will Christmas be better than last year as Boris Johnson has promised? Christmas is a key trading period for many companies and the hard hit hospitality sector is already worried that some firms are cancelling Christmas office parties, due to Omicron fears.

The Bank of England has already described Omicron as a ‘punch in the face’. It is having to think about its earlier transitory inflation guidance with inflation forecast to peak at over 5% in early 2022. With a strong economic recovery underway in the UK it should be moving interest rates up, but now has to consider the potential impact from Omicron. It also has to consider business and consumer confidence. The UK economic recovery is built upon the release of pent-up demand, but will consumers become more cautious? Households, like businesses are facing higher energy bills and taxes so the Bank of England needs to tread very carefully. Our European neighbours are also facing similar challenges but have the additional challenge of low vaccination take up in some countries, even before Omicron arrived.

Let’s hope vaccines ride to the rescue for us and importantly Father Christmas. Otherwise, there is a real danger that Christmas becoming a Boris Peppa pig in a poke!

Anxiety attack on the financial markets shows some signs of alleviating

Susannah Streeter, Senior Investment and Markets Analyst at Hargreaves Lansdown spoke to Business Leader on November 29th following the original announcement by the government, regarding the changes in restrictions. She shares her analysis on the impact on the UK financial markets.

The anxiety attack on the financial markets shows signs of alleviating, as investors pause for breath and spot signs of optimism while scientists race to establish the severity of the new variant. The FTSE 100 opened up 1% in early trading, recovering some of Friday’s dramatic losses and the FTSE 250 was 1.5% higher.

Amid the doom which took hold as doors were slammed shut on travel routes from Africa and increased restrictions were imposed, there are glimmers of hope. There are reports from doctors in South Africa that Omicron infections don’t seem more severe and the World Health Organisation’s appeal for caution also appears to have calmed some nerves. It has observed that although there appears to be increasing rates of hospitalisation, that may be due to higher numbers being infected rather than due to its specific strain.

This has helped ease concerns that global trade will be severely dented if the new variant takes hold, which saw the steepest falls in the oil price in 18 months on Friday. A barrel of Brent crude has rebounded a little, rising by 4.5% initially but then falling back, hovering around $75 a barrel. The slight recovery in the oil price has helped BP and Shell which opened higher. After nosediving on Friday, British Airways owner IAG, has edged back upwards, up by more than 3% in early trading, amid hopes that travel restrictions will be limited to those rolled out over the weekend, until more is known about the virus. EasyJet and Ryanair have also caught a ride upwards, rising by around 2%.

On the FTSE 250 the companies showing the steepest recovery were those re-opening stocks which saw some of the sharpest declines as fears took hold on Friday.  WH Smith which has become hugely reliant on sales across its outlets across the travel network jumped by 5.7% while the Restaurant Group was up by 4.7% in early trade, closely followed by Carnival, up by 4.6%. News of queues at vaccination sites, with demand for booster jabs high has helped with the relief wave amid hopes the fully vaccinated will have more confidence to keep travelling, eating out and booking cruises next year. But still, this is not a complete snap back, worries remain that demand will be more subdued that expected, and patience is going to be the name of the game until more is known about the trajectory of this strain.

Topping the FTSE 100 leader board is BT, amid reports that India’s Reliance Industries is considering a bid for the company. Talks are believed to be in their early stages, but Reliance is considered to be keen to get at least a foothold in the telecoms company. It’s clearly interested in BT’s future growth plans with its focus on profiting from the roll out of fibre broadband and 5G. News that the Indian conglomerate Tata Chemicals is in talks to buy the battery materials business put up for sale by Johnson Matthey has also sent shares in the FTSE 100 listed company higher. The price tag rumoured to be attached to the potential bid of between $500 and $700 million is clearly seen as attractive as it would give the company more financial firepower to expand its presence in hydrogen technologies.

It’s a wait and see mood on the markets today, as speculation swirls about possible takeovers and investors stay on high alert for any fresh detail about Omicron and its potential impact for the direction of the pandemic.

Following the initial fallout of the Government’s announcement on how to counter the rise of the new Omicron variant, Streeter then provided this further analysis of the impact on the financial markets.

The roller coaster ride has resumed on the financial markets with yesterday’s rally looking more like a break run between a double dip of losses.  Investors are now strapping themselves in for a volatile ride anxious for any further news which could lift sentiment or send it plunging again, such as the comments from Moderna’s chief executive that current vaccines will struggle with Omicron because of the high level of mutations on the spike protein. It’s not known just how less effective they may be, and the waiting game continues as scientists scramble to assess the new variant, but amid this state of uncertainty, nervousness is high, with the FTSE 100 falling 1% in early trade.

Amid the pessimism about the effectiveness of vaccines, AstraZeneca is among the biggest fallers on the FTSE 100 so far. Its vaccine has been produced at cost and now investors are clearly wondering if they will ever see a profit from this part of the business.

Energy stocks and banks are among the biggest fallers as investors worry about the economic effect of Omicron, as it risks dampening down demand and becoming a significant set-back for global economy. Brent crude fell 3% to $71 a barrel, pulling down energy stocks like BP and Shell by more than 1% in early trade.

Lloyds galloped into the red, followed by Barclays and HSBC amid expectations that Omicron makes the already fragile recovery in the UK even weaker. Hopes are fading that the Bank of England will raise interest rates later this month, which means chances of clocking up bigger profits in their lending businesses are receding.

For now travel stocks are managing to keep out of another tailspin, having already been left reeling by the steep black Friday losses. British Airways owner IAG clawed back into positive territory after briefly opening lower. Airlines have been boosted by an upbeat note from EasyJet which is still predicting, despite worries about the new variant, that capacity will soar back to pre-pandemic levels by next summer. This is, after all, a white knuckle ride companies have already experienced. Although they know all too well how consumer sentiment can drop at every sharp turn, it can also rebound if good news comes knocking.

Ocado is one of the few FTSE 100 risers, amid expectation that online orders will rebound once again if nervousness returns about trips to bricks and mortar supermarkets. That worry may be partly behind Sainsbury’s 2% fall today. There are also concerns though that fresh restrictions may make supply chain issues even worse, and the retailer has already raised the alert about shortages of some items at its Argos arm. J D Sports 80% fall today however, isn’t over pandemic concerns but due to the fact the stock split comes into effect today, which reduces the prices as the number of outstanding shares has increased.

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