07 Dec 2021
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Friday 26th November 2021 was ‘Black Friday’ but for many investors, the focus was on the news of a new and potentially vaccine-evading strain of the coronavirus, the Omicron variant, with concerns over another lockdown and the re-introduction of travel restrictions leading to a fall in global equity markets.
Companies in the hospitality and travel industries were the most severely affected with International Consolidated Airlines Group, owner of British Airways, falling by around 15% on the day. On the following Monday, most markets staged a recovery as fears subsided and many investors took the opportunity to add back in (although hospitality and travel still struggled). Stocks receded again on the Tuesday as sentiment waned in the wake of drugs giant Moderna casting doubt on vaccine effectiveness against the new variant, then recovered strongly again on the Wednesday (but the US markets fell sharply again towards the end of the trading day!).
Were the initial falls an overreaction? Some sectors would benefit but concern over certain industries being directly impacted by further restrictions is justifiable and there would be a knock-on effect on wider economies as consumer spending and working practices changed, but the market falls were disproportionately widespread. The emergence of the Omicron variant led to a sense of alarming unease among investors who were naturally fearful about tighter restrictions hitting global economies hard once again.
Let’s look at what we know: the world, and in particular western economies, are in a much better place now compared to when the coronavirus materialised on a global scale in early 2020. When the virus first arrived on our shores, we were ill equipped when it came to identifying and treating Covid-19, but now health care providers, the scientific community and drug companies have a much greater understanding of the virus, and the support and infrastructure are available, allowing us to test, vaccinate the population and adapt quickly to the twists and turns of the constantly evolving coronavirus. We are without doubt in a much stronger position to combat Covid-19 than we were 18 months ago.
Let’s face it - a new variant is always unwelcome, but it shouldn’t have been entirely unexpected as the coronavirus, like the flu, will continue to mutate and there may well be further potentially troublesome variants ahead. We don’t yet have all the data we need to assess the impact of the Omicron strain so it’s still too early to know what the wider impact will be, but the coronavirus will be with us for a long time, if not forever, and we have little choice but to adapt to that evolving reality.
What else could impact on global markets? Growing geopolitical tensions in the world could escalate and have a significant impact on global affairs - some nations are taking advantage of disparity in the west to bolster their positions. Tensions are rising between Russia and its European neighbours, China and North Korea are displaying new missile technology as relations with the US deteriorate, and Iran continue to develop their nuclear capability.
How should investors interpret all this uncertainty in the world? One strategy could be to hold large amounts of cash or very defensive assets which provide little or no return just in case these tensions intensify. Sitting on large amounts of cash because you’re worried that China is about to invade Taiwan isn’t a realistic investment strategy though - we may not have a crystal ball, but the real value of your investments would be eroded by the effects of inflation if you play too safe.
Sometimes it does pay to be more prudent and at times of heightened tension or when valuations are looking expensive, active investors should consider tilting portfolios towards more defensive assets. If accessing funds in the near term is a requirement, being heavily weighted towards defensive assets could be the way forward. For the mainstream investor though, trying to guess what the future will bring and making large scale and frequent changes to investments rarely proves successful over the longer term. Timing market movements perfectly to maximise returns is every investor’s dream, but catching the bottom is almost impossible, and selling at the top even more so.
We should always be mindful of geopolitical events and their possible impact, but as investors we should make financial decisions based on fundamentals; the tangible elements that we can analyse and interpret such as data on the strength of global economies, the corporates that lie within and their subsequent consumers.
Unforeseen and unpredictable events will happen, there’s nothing new about that. The coronavirus pandemic has been an exceptionally disruptive event and has thrown so many challenges at us, but other global incidents also add to the eclectic mix. The world is facing major uncertainties, some threats will disappear, but new ones will emerge. Setbacks are a given, but by sticking with core investment principals and not overreacting to extreme market movements, a diversified portfolio of investments can generate meaningful returns over the longer term.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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