Virus-flashback

Omicron

This new variant of the virus first appeared in Botswana on 11 November. Shortly afterwards, there were more cases in South Africa, in the province of Gauteng, 400 kilometres from the Botswana border. Gauteng is South Africa’s smallest province, but one-quarter of its population, thanks to big cities like Pretoria and Johannesburg. Omicron is a special variant of the virus because of the many mutations, more than thirty of which are on the spike protein. This is the protein that gave the coronavirus its name. These spike proteins protrude from the outside of the virus and play an essential role in penetrating host cells. These same spike proteins are recognised by current vaccines, allowing antibodies to be produced in time. One consequence of the many mutations could be that current vaccines work less well. At the same time, it is unlikely that they would not work at all. It will be another 7 to 10 days before we can say anything with any certainty. 

There are many variants of the original coronavirus, and only those that might pose a danger are given a letter from the Greek alphabet. Now it was actually the turn of the letter Nu, but because Nu sounds too much like ‘New’ in English, another letter was chosen. The following letter, Xi, was also not an option for understandable reasons. That is why it became Omicron. In the province of Gauteng, Omicron is rapidly displacing the Delta variant of the virus. The Delta variant has led to additional restrictive measures. Given its infectiousness, it is likely that Omicron will displace the Delta variant. This is also reflected in the rapid international spread. Closing borders and stopping air traffic will probably slow it down, but not stop it. Again, it will only be clear in a few weeks’ time exactly how contagious this variant is. 

There are hopeful signs that the course of the disease caused by Omicron is milder than that of the Delta variant. However, it should be noted that the population in Gauteng is relatively young and that the disease is currently spreading mainly among young people. The symptoms also seem to differ from the Delta variant. Omicron does cause the number of hospital admissions in South Africa to rise, but there are fewer people with severe symptoms. However, it should be noted that the serious symptoms with Covid only manifest themselves after a few weeks. Relatively many children under the age of 2 are admitted. However, the absolute numbers are small, so that little can be said statistically. The fact that a virus has become more contagious and milder at the same time does fit in with the development of earlier viruses. The best survival strategy of a virus is that it is highly infectious, but then without the host being homesick or dying. Again, everything is subject to further research, probably with more certainty in a few weeks’ time. 

Economic impact

The first waves of the pandemic have shown how big the consequences can be for the world economy. Certainly, the lockdowns are quite heavy. Yet there will be a difference with previous outbreaks. First, society is better prepared. Like the virus, humans are adapting. Perhaps we have viruses to thank for our ability to adapt so quickly because due to all the virus attacks in the past, 8 per cent of human DNA now consists of virus DNA. The restrictive measures almost immediately affect the service sector and especially the BEACH companies (BEACH stands for Bookings, Entertainment, Airlines, Cruises and Casinos, Hotels and Hospitality). These companies employ a relatively large number of people. At the same time, they are hardly represented at the stock market. Therefore, the stock market will once again be able to give a different picture than the economy. 

Although everyone quickly assumes that the new variant is more dangerous than the Delta variant, this need not be the case. It is also possible that a milder variant of the virus will supplant the Delta variant, simply because the milder variant is more infectious. If mild means that significantly fewer people need to be admitted to hospital and intensive care units, then the Omicron could be the beginning of the end of the pandemic. Given the speed of infections, it could be over by the summer. Even if the existing vaccines work less well, producers like Moderna and Pfizer/Biontech have already indicated that they will have new vaccines available in large numbers within a hundred days. On top of that, there are further developed virus inhibitors and better treatment methods in the hospitals. 

The difference with previous outbreaks is that many countries are starting to become corona-weary. There is a risk that strict measures will simply no longer be accepted. We see this in the Netherlands, but also clearly in several American states. On the other hand, there is a greater chance that this variant will lead to governments requiring everyone to be vaccinated, resulting in the necessary social unrest. The advantage of the restrictive measures is that it reduces inflation. However, this is only true in the short term because of the fall in demand. In the long term, restrictive measures could cause even more disruption on the supply side of the economy and thus more inflation. 

Impact financial markets 

Financial markets do not like uncertainty and tend to immediately price in the worst-case scenario. Now, the timing of Omicron was also very unfortunate. First, we are in the middle of the flu season, which makes this type of virus fairly easy to transmit. Furthermore, the first signals came out on Thanksgiving, the time when the stock exchanges are closed. In the night from Thursday to Friday, more details were revealed, which mainly affected the Asian markets, which usually have bigger results when there is unrest in the world. And on a Friday, investors suddenly had to look over a long weekend. It also did not help that a person infected with Omicron was immediately found in Hong Kong, the birthplace of SARS. In the shortened trading session last Friday, there was a typical sell-off: sell first and ask questions later. 

The advantage of uncertainty is that it is always maximum at the start. As time passes, more details become known. This makes the scenario less gloomy, or it is seen more as a one-off event, something that stock exchanges do not care much about. What stock markets do care about is the effect of this new outbreak on monetary policy. Last Friday, interest rate hikes for next year were priced out at a rapid pace. The major central banks will meet again in mid-December to make an interest rate decision, so a pause does seem appropriate. Equity markets have always performed well under Corona. Of course, there were negative effects on the economy, but these were more than compensated for by extra liquidity. Liquidity creates bubbles, and that is addictive. The risk then is not more liquidity, but less liquidity, for instance, because the danger of a virus has passed. The cynical effect would then be that equity markets corrected because the corona crisis has ended. 

The most likely scenario is that interest rates remain low and inflation high. This limits the room for manoeuvre for central banks, but at the same time, it ensures that real interest rates are strongly negative. In such an environment, it is ideal to blow bubbles. It is an even better scenario than the Goldilocks scenario in the second half of the 1990s. To stay in this day and age, the Uber-Goldilocks scenario is still happening. Incidentally, very bad days in the stock market are surprisingly often alternated with very good days. These days are usually clustered, which makes it dangerous to get out. It is unlikely that the new virus variant will cause a recession, helped by large-scale investments by companies and the government. Low-interest rates keep valuations high, but as long as the equity risk premium is as positive as it is now (at the highest levels this century), there is little chance of a new financial beating from that side either.