The emergence of the omicron variant has, unsurprisingly, unsettled markets. A reminder, if any were needed, that the global pandemic is far from over.
Inevitably there will now be a vacuum whilst data is accumulated to best decide how to combat the new variant. A vacuum that will be filled with speculation, expert, and not so expert, analysis. This is not helpful for markets in risk assets which function at their best when risk can be more accurately accounted for.
This highlights one of the biggest difficulties for investors, and by association, ourselves as investment managers. Some will feel the gut instinct to ‘run for the hills’, sell up and hide in cash. After all, things are looking pretty worrying, aren’t they? We cannot know for sure how bad they may get in what remains of 2021.
Of course, many clients would be constrained by potential capital gains tax from selling everything, but others are invested in ISAs and SIPPs where they would not be so restricted.
Consider however that cash earning no return is losing real value to inflation. And consider also that when you are in cash, history shows time and again that the best time to have reinvested is when fears are at their most heightened. Obviously, this is the time when you least feel inclined to invest.
We will always focus on long term investment. When clients know that they are going to require funds in the near term, we are cautious and look to raise those funds now rather than risk adverse short term market movements. Otherwise, returns are generated more by time in the market, than by trying to time the market.
In the round, equities have performed well in the face of the pandemic thus far. Most markets are comfortably ahead of their pre-pandemic level and dividends have bounced firmly from the lockdown-induced hiatus in 2020 and early this year. Markets are likely to settle down again as more is known about the new variant.
Companies are valued on their future prospects, stretching over years. Many have already demonstrated how well they have adapted to the pandemic. There is nothing yet to suggest that the omicron variant fundamentally changes the long-term investment outlook.
Whilst it is the government’s reaction that will decide how constrained, or otherwise we are in our day-to-day activities, it is the reaction of Central Banks which have the biggest impact on markets. Indeed, the high-profile discussions around reigning back on asset purchases (tapering of Bond purchases) had already caused markets to lose a bit of momentum.
Should the data on omicron confirm some of the worst concerns, Central Banks can still move to underpin financial markets once again. It has to be acknowledged that their firepower, and therefore influence, is less obvious with base rates already negligible and inflation elevated, but they can still do ‘whatever it takes’.
For our clients, we remain watchful but believe that the current volatility will pass.
Please keep safe as the festive season unfolds.