Clement Inbona

New corona variant: A flash in the pan or a wildfire?

A gust of panic swept in after Thanksgiving. Investors have woken up to a hangover: the major indices dropped between 3% and 4% as soon as the European markets opened. To understand why, we need look no further than concern about the emergence of a new variant discovered in South Africa. Its numerous mutations are fuelling fear that it is more contagious than other known variants, and also that available vaccines will prove less effective against it. For the moment, the information on this variant is still fragmented and largely based on modelling, rather than purely factual data: perfect circumstances for an overreaction.

It must also be said that this correction occurred at a moment of reduced liquidity, with the US market closed on Thursday 25 November and shorter opening hours on Friday 26. These conditions go some way toward explaining the erratic market reaction. Moreover, this correction comes at a particularly buoyant time, as, prior to this episode, the major equity indices had all gained over 30% since 9 November 2020, when the first vaccine against COVID-19 was announced. This upward movement also managed to shake off the health risk despite a wave linked to the delta variant and the resurgence of seasonal waves.

Apart from equities, the reaction has been relatively exaggerated, as interest rates have fallen sharply, in anticipation of a more accommodating posture from the central banks. In terms of securities, the hardest hit have naturally been those linked to the reopening of the economy, while “stay-at-home” stocks have come off more lightly.

While this new variant may raise fears of fresh restrictions likely to reduce the movement of people, goods and services, it should be stressed that the health crisis we have endured for nearly two years has made companies and states more resilient in the face of such obstacles.

It is probably too early to judge whether or not the market reaction is justified. Above all, we should note that this variant is poorly understood and therefore its impact cannot be predicted yet. It is a cause for concern because its high number of mutations involve the spike protein used by the virus to enter the human body. On the other hand, we cannot tell for the moment just how dangerous it might prove to be. If it were to intensify, it could well spread like wildfire and bring the economy to a standstill once again. But if the danger turns out to be minor, it could be just a flash in the pan, after which equities and the economy may return to even stronger growth.

 

 

Final version of 26 November 2021, Author: Clément Inbona, CIO of LFDE