The Omicron Variant and What it Means for Your Investment Strategy

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Until a few days ago, people were confident that the worst days of the pandemic are now behind us. Global stock markets were climbing from one all time high to another. Today, we know this was an illusion. Not only are Covid infection rates at levels unseen at any time before, additionally another virus variant – named after the greek letter Omicron – with many and very concerning mutations emerged in South Africa. When the news about the new variant emerged, global stock markets tumbled. Japans Nikkei index and the German DAX lost more than -5 % within a single day.
impact-of-omicron-on-investments
So far, little is known about the actual effects of the virus. However, the sheer number of mutations led leading scientists and politicians to suggest and impose strict precautious measures. Amid concerns over a potential vaccination escape and increased spreading abilities, many countries are halting travel to South Africa and other countries. Pfizer, BioNTech, Moderna and other vaccine makers are rushing to determine whether their existing vaccines prove effective against the new strain.
From an investor perspective, it is worth to think about what has worked well in similar scenarios in the past – and what did not. In order to avoid human bias and misjudgment and also not to rush to any premature conclusions, it also helps to think in scenarios. Thinking in scenarios will help you as an investor to carefully analyze any given situation and arrive at a more reliable conclusion. As an example, below are two scenarios on how the new virus mutation may affect global stock markets and what you as an investor can do in each scenario.
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The ”Best Case” Scenario

The best outcome of the current Omicron-scare would be a scenario in which the mutant is found to be a combination of the following three aspects:

  • The Omicron mutation will lead to less severe infections compared to the Delta variant
  • The characteristics of the Omicron mutation will make the virus spread slower than initially expected
  • The current existing vaccinations prove to be effective against the Omicron variant (hence no immune/vaccination escape)

If these 3 aspects prove to be true, the Omicron variant can in fact have a positive effect on the current pandemic. Given that the Omicron variant may have a competitive advantage over the Delta variant, Omicron will also reduce severe illness and hence hospitalization rates as well.

Such a scenario would in our estimation result in a sharp market recovery, given that all else remains equal. Hence, investors may hold their current positions and may not find it necessary to apply major strategy changes to their current investing approach.

The “Worst Case” Scenario

A worst-case scenario would mean a combination of the same 3 aspects, but with the opposite result:

  • The Omicron mutation will lead to significantly more severe infections compared to the Delta variant
  • The characteristics of the Omicron mutation will make the virus spread a lot faster than the Delta variant
  • The current existing vaccinations prove to be not effective against the Omicron variant (hence full immune escape variant)

In fact, if these 3 aspects turn out to be true, it can easily be described as a “black swan” event. Actually, it will put us all back to square one in fighting this pandemic. It would mean, we have an entirely new pandemic with a virus that is even worse than the ones we have had before. Global markets would surely tumble on those news and likely trigger a massive sell-off. If this scenario turns out to be true, Investors may protect themselves by taking advantage of stop-loss orders. Additionally, stocks in the travel and leisure industry may be worth taking a closer look at, but only following a market selloff.

Conclusion

There is a saying that you should always prepare for the worst and hope for the best. Our approach would be to be aware of the worst-case scenario but not panic about it. Based on the current research the worst-case scenario is rather unlikely. But so is the best-case scenario, too. Therefore, investors should prepare for some additional volatility in the markets. Especially given other current macroeconomic factors such as rising inflation rates.

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