How fundies are reacting to Omicron

Having been told my entire life by my nearest and dearest (read: my Mum) that I catastrophise far too much, I was surprised by my nonchalant reaction to recent market weakness following news of a new COVID variant. 

On Friday, the S&P/ASX 200, S&P 500, and NASDAQ 100 all slid more than 2%. While the oil benchmark, the West Texas Intermediate, fell 13%. Meantime, as these benchmarks brush off fears and start on their recovery, the VIX index, which tracks market volatility, has skyrocketed around 21% to 22.96. 

Perhaps I am alone on this, but I feel like I have become "used to" this market volatility that we have seen on and off again over the past 20 months. And in that, accustomed to news of new varients, mounting inflationary forces, and further lockdowns. 

Instead of checking my portfolio on the hour every hour, declaring Christmas to be cancelled, and mourning what would have been marvellous holiday plans (even despite La Niña), my response has been wholly unemotional. 

But is Omicron actually worthy of investors attention? For starters, what could it mean for rate rises, inflation, government stimulus, and ultimately, markets? And should investors pivot their portfolios in light of recent developments? 

Well, my friends, you've come to the right place. We spoke to four fundies to see how they are reacting to news of a new COVID variant, including Catherine Allfrey, Roger Montgomery, Emanuel Datt and Tim Davies. 

Hopefully, this article can help you rest easy at night, or alternatively, gives you a shot in the arm to reconsider your portfolio positioning. 

"We need more clarity..."

Catherine Allfrey, Wavestone Capital 

We do need more clarity on the likely transmissibility and severity of the Omicron variant and whether it will weigh on the efficacy of vaccines. 

I think the main difference to the Delta surge is that we also have antiviral treatment options that work. Besides if the theory is right that for its own survival the virus gets less deadly, will we finally see the end of COVID? 

If the vaccines are deficient and an extended lockdown occurs this of course restricts economic activity which feeds into lower GDP and earnings growth. As a result, we would expect a market correction given the uncertainty and how strong markets have been in the last 18 months.  

I don’t think (another lockdown) would necessarily entail more stimulus and higher inflation as developed world governments are highly indebted and monetary policy especially in Australia is still supportive for the economy. Richer governments are better off putting resources to get the poorer countries vaccinated than stimulating their economies.

In a sharp sell-off, it is difficult to watch a stock get crushed but it is why we run a diversified portfolio of quality stocks with valuation support. 

We also always take a 3-5 year view when investing in a company so if the stock is sold down due to short-lived Omicron travel restrictions we are more likely to buy once the stock has been hit. We are always watching for individual stock dislocation so we can snap up a bargain.

We always stick to our process and buy quality stocks with valuation upside. We look to increase the position size on stocks we are long and take advantage of the slide and pick up a bargain.

"It all comes down to two questions..."

Roger Montgomery, Montgomery Investment Management

We know Omicron is more transmissible, we've already seen that demonstrated. If you look at hospital admissions in the Gauteng region of South Africa, which includes Pretoria and Johannesburg, which is about 460 kilometres southeast of Botswana, where this particular strain of the virus was first observed back on the 11th of November - we know it transmits more readily, we know hospital cases are up some fourfold in two or three weeks. 

What we don't know is whether it's more dangerous than Delta, or whether it can evade our vaccines. So they're the two questions that we need to answer. And we're not going to know until scientists get the Omicron antibodies back. 

The first lab results will probably be out later this week. And Pfizer thinks they will publish an assessment of its vaccine performance in two weeks. So we'll have something in a week, and then we'll learn more in two weeks.

If the virus evades the current crop of vaccines it's not good. I don't want to overstate the obvious, but that would send us back to square one. 

Having said that, the vaccine producers tell us that we're not starting from square one. We're well advanced in terms of understanding the virus and relatively quickly, we would be able to come up with new vaccines. But you've got to always bet on humanity to solve these sorts of problems. So temporarily negative, but long term positive.

We are currently interested in those companies that are structural growers and we believe that companies that are producing growing and reliable income streams are really attractive in an environment - outside of the Omicron virus - where we think lower interest rates, lower wage growth and lower inflation are all structural. So in that environment, demand for businesses that are able to produce reliable income that's growing will remain very, very attractive. Companies like National Storage REIT (ASX: NSR), the Waypoint REIT (ASX: WPR) which owns petrol stations, and Ingenia Communities (ASX: INA), for example. 

"Take advantage of any selloff opportunities..."

Tim Davies, Holon Global Investments

Another extended lockdown will almost certainly require additional massive stimulus from over-indebted state and federal governments across the world. 

Markets themselves would likely take a short term hit lower before central banks quickly step in and promise “orderly market support” to “do whatever it takes” to settle things down. 

We have seen this playbook multiple times from governments and central banks - not sure why they try and deviate from it given high asset prices signal past use has worked well. Investors could rotate back into lockdown winners like Netflix (NASDAQ: NFLX), Zoom (NASDAQ: ZM), Google (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN) and other cloud stocks.

Inflation might actually slow down in a lockdown situation. That would then allow ports across the world to ease some of their 2021 congestion issues. 

The level of any inflationary slowdown would depend on the duration of lockdowns – if consumers start to worry about losing their job or lower revenue in their business, it makes sense they will start to spend less post the Xmas rush period. This is the “transient” part of inflation the US Fed is discussing – the surge in demand from COVID-19 reopenings across the US and world.

Our Holon Photon Fund currently holds 17 companies that we feel are well-positioned to benefit from the shift towards a digital world over the next two decades. Taking such a long-term view comes with bouts of substantial volatility, particularly when unforeseen events like COVID-19 strike. 

We do not sell down positions because of broad market selloffs, but we do usually hold 5-10% cash in our portfolio to take advantage of any selloff opportunities and add to our existing positions.

An example is Alibaba, which has seen its share price trading at rock-bottom valuations at 2018 price levels. While it is easy to get caught up in market fearmongering over China, taking a closer look at Alibaba’s operations reveals a company unmatched globally outside of maybe Amazon... We believe it offers tremendous upside for long-term patient investors willing to accept US/China politics related volatility that hits the stock every 3-4 years.

"It's best to stick to the basics..."

Emanuel Datt, Datt Capital 

Australia is heavily dependent on foreign labour and has struggled with increasing its labour participation rate over the past 18 months due to generous and unpoliced government support packages. Accordingly, we believe that another lockdown would entail similar forms of stimulus and higher cost inflation driven by a shortage of products and labour relative to increased demand from easy money policies.

When markets are sliding, we find that it's best to stick to the basics. In that sense, to try and identify businesses where there are improving fundamentals despite a weaker share price performance. 

These situations are surprisingly common in sustained market downturns but do require skill to identify. Ideally, these opportunities should have a potential 'value catalyst' which could provide immediate upside, one which could be M&A.

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