This column first appeared in Business Day
So what now? On Friday, investors reacted suddenly to news of the Omicron variant, having largely shifted attention to other issues, particularly the inflation and interest rate outlook. Covid-19 was, in many minds, something that developed markets, at least, had under control. That has changed quickly.
SA was the epicentre of a global shock because the spread of the Omicron variant seems to be most entrenched here. While the JSE all share index was down 4.5% in dollars, the MSCI World wasn’t far behind, falling 2.5%. Markets price an uncertain future. It could turn out that the variant is clinically mild and well controlled by vaccines. On the other hand, it could presage a new wave of strict lockdowns.
Given that the progression of the variant is most advanced and studied in SA, markets will again be driven this week by what happens here. While businesspeople and tourists were rushing to get out of SA over the weekend, I would expect that smart hedge funds would be sending their analysts to our shores to be closest to new information.
Decision theory counsels that choices should be guided by what delivers the highest probability-weighted payoff. We are faced with a set of possible worlds from the benign to the malevolent. Think of these as options in a lottery and our jobs as decisionmakers are to assign probabilities to each possible world. Then we must make our investment decisions based on expected payoffs.
Investors the world over are going to be focused on calculating those odds. Some of those can’t be done in the laboratory or through theoretical modelling but must be observed. And those observations are going to be happening in SA.
Analysts will be keenly focused on test results and hospital wards. What is the admissions trend relative to the underlying positivity rate? How many of the patients are vaccinated and with which vaccines? What is their clinical outcome? We can expect that the variant will quickly be detected across the world, but given SA has a high prevalence it is likely to be best positioned to offer answers on what the rest of the world can expect. These answers will drive markets with SA at the centre of global attention.
On Friday, investors were overweight the worst of possible worlds, with gold and gold companies among the only spots of green on the equities market, while government bonds rallied on views that the upward interest rate cycle may be stayed. Typical safe havens like cash retailers were down (Clicks was the one exception — perhaps it will benefit from a fourth wave). Internationally, the winners so far in the pandemic, tech stocks like Amazon and Meta (Facebook), were also down (though vaccine makers rallied). Financials were among the worst off both here and abroad as investors had to sharply revise expectations that the credit outlook was improving.
I expect this will look rather different on Monday. With a weekend to ponder and more information coming to the table, decisions will become more rational. Investors have been focused on the inflation outlook: will that now be fundamentally shifted? Commodity prices were down decisively on Friday, with oil more than 11% lower. That, like the equity price plunge, may have been overdone. If inflationary forces are being driven by supply chain disruptions while underlying demand remains stable, we may see Omicron as a contributor rather than suppressor of prices.
SA, however, will diverge from the global outlook, particularly if the variant turns out to be benign. That is because the damage will be severe here regardless, because of the effect of global restrictions on travel. Our tourism industry desperately needed a strong December and that has been torn away in an instant. It is the most vulnerable corner of the economy and the distress there will inevitably spill into greater risk aversion and a worse credit outlook more broadly. This could be compounded if new lockdown measures are taken in SA, which have so far disproportionately affected the hospitality and tourism sectors.
The variant shock confirms that Covid-19 is becoming an endemic feature of our lives. The fight against it is gradual and ongoing, our task being to slowly limit its impact through vaccines and other interventions. New variants are going to be an ever-present risk, and our management regime needs to explicitly prepare for periodic new variant shocks. If last week taught us anything, it is that the possible worlds we face all include a level of Covid-19 vigilance, with societies always on guard and ready to quickly implement measures to control anything that may hit us in future. Preparedness is the one thing we can control, and last week we got a sharp reminder that investors need to be ready.
• Theobald is chair of research-led consulting firm Intellidex.