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Another episode of Nightmare on COVID Street

1 Dec 2021 8 month(s) ago

Yep, it's back. Be very afraid.

The appearance of the so-called Omicron COVID mutation has reintroduced uncertainty in global stock markets, producing falls in stocks and commodities and a rise in bonds. There are strong indications out of South Africa that it is ‘mild’, but that has not stopped markets from reacting and Europe is looking at reintroducing lockdowns – any excuse, I suppose. It has been two years of this, and society and the markets the markets are traumatised.

Macquarie has given its thoughts about the implications, saying it is not back to 2020, but it is not ‘nothing’ either:

“We do not expect the same level of volatility seen at the start of the pandemic, as the world has already adapted to life in a pandemic. But given central banks were tapering plus diminishing fiscal stimulus and generally already high asset prices, there is a risk equity market volatility is higher than during COVID waves over the last year. ?

“We believe the cycle was already slowing into a “mid-cycle slowdown” and that given the low Equity Risk Premium there was already a risk of volatility. The risk of more lockdowns (e.g. Austria) as cases rise, plus a new variant add an additional risk. On the positive side, rising COVID concerns also delay monetary tightening, and this expectation is already reflected in the large decline in bond yields on Friday.”

Macquarie sets out to assess the likely implications for individual stocks using what it calls the “COVID capture ratio” These are the beneficiaries:

“ASX 100 stocks with a COVID capture ratio below 0.95, rated Outperform and with relatively defensive earnings include: GMG, BXB, ASX, NST, AMC, COL, FPH, CHC and NXT. These stocks are likely to suffer, according to Macquarie

“ASX 100 stocks with COVID capture ratios above 1.05 and rated Underperform or Neutral include: WPL, WBC, CBA, SCG, VUK, AMP, CGF, NEC and VCX.”

Volatility tends to be more a matter of interest for short-term traders, but long-term investors can use it to buy in cheaply. For those looking at tweaking portfolios this is a time to watch closely.


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