Fundies stays on course despite risk posed by new COVID strain

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“The market has far exceeded the likely impact of the latest variant on oil demand, with a higher structural price revision due to the drastic change in the oil supply response function that awaits us,” he said. said Damien Courvalin, head of energy research at Goldman Sachs. note earlier in the week.

Strange reaction

The overreaction of the equity market was also evident this week.

On Wednesday, the S&P 500 took a 1.9% gain in the morning session to end the session down 1.2% after a single case of omicron was confirmed in the United States.

The swing of more than 3% on Wall Street during the session seemed odd given the news earlier in the week that the omicron variant was already in Europe and it was almost inevitable that it would end up in the States. -United.

Comments by Federal Reserve Chairman Jerome Powell during the week also seemed to reflect the belief that the global economic recovery would not be blocked by the new variant. During his testimony before the Senate Banking Committee in Washington, Powell said the bank would cut asset purchases faster than expected.

I wouldn’t bet with the farm that you know more about omicron than current market pricing.

– Andrew Mitchell, senior portfolio manager at Ophir Asset Management

This week, SG Hiscock’s Tadgell touted the company’s positions on several hard-hit stocks in this week’s massive sell-offs, reflecting the belief that the new variant would not significantly affect the economic recovery.

“You have to be active in this environment,” he says. “We recently added things like business travel management to the portfolio, and we also see CSL as a strong business in the recovery.

“We also have energy exhibitions with Woodside and Cooper Energy. “

Energy stocks sold off massively last week, with Oil Search, Santos, Origin Energy, Woodside Petroleum and Beach Energy among the market’s worst performers in the past five sessions, reflecting lower oil prices.

Travel stocks also found themselves in the crosshairs given the number of countries restricting arrivals from southern African countries, with Webjet, Flight Center, Qantas and Corporate Travel Management all hit during the week.

“We’re still reasonably constructive around reopening, and we’re using dislocation to add to some of those reopening positions,” Tadgell said.

SG Hiscock also backs several stocks which have weathered the market panic well. The rush to defensive stocks such as Uniti Group and Chorus, both in the company’s portfolio, will offset some of the damage caused by the losses of its other stakes.

Andrew Mitchell of Ophir says there is a silver lining if omicron “is indeed a less serious disease” than earlier strains. Rhett wyman

Tadgell’s philosophy reflects the belief of many fund managers that trying to move positions in the midst of a sell-off can be risky.

Since there is so little certainty about the omicron variant, fund managers caution against any attempt to bet on which direction the market will take on any given day.

Andrew Mitchell, senior portfolio manager at Ophir Asset Management, said: “Markets hate uncertainty, so we’re all in a bit of a muddle until we get some clarification on the three key questions regarding omicron: measure transmissible? How virulent is it? And do vaccines work against it?

“If you are a fund manager, however, I wouldn’t bet with the farm that you know more about omicron than how the market currently sets it. “

Mitchell says the first signs were that the omicron wouldn’t be as destructive as the other strains had been.

“Based on early evidence – and it’s far too early to be definitive on this – it may appear to be more transmissible than delta but less virulent, and existing vaccines offer some protection against serious disease,” says he. “There is a silver lining if it is indeed a less serious illness.”

Focus on the fundamentals

Either way, Mitchell says Ophir is more focused on assessing any impact on bottom-up fundamentals rather than finding market navigation.

“For us, we prefer to avoid thinking that we have better knowledge of viruses than the market and focus on companies that are less affected by the two big risks to the markets right now – the omicron and rates. higher interest, ”he says.

“Like Warren Buffett said, you have to know what your circle of expertise is. We prefer to stick to our knitting and focus as much as possible on the bottom up.

Mitchell says the impact of the virus would be felt harder in some industries, especially with risk-averse politicians reacting quickly to new variants.

“I think politically, even though people will accept some form of restrictions on international travel, it’s hard to see countries revert to strict closures unless there is a chance that health systems will be overwhelmed – which seems unlikely at this point, ”Mitchell said.

“I think this probably delays the resumption of international reopenings like international travel inventories, but domestic reopenings will likely be much less affected. “

Many Australian fund managers appear to have been in a good position to weather such a disruption as omicron, by increasing their exposure to stocks whose earnings lie outside the business cycle.

According to JPMorgan’s analysis, Australian professional investors had reduced their exposure to economically sensitive sectors even before the omicron variant was discovered.

“Long before omicron blocked a return to some semblance of normalcy, Australian investors had started reducing their cyclical exposures,” said Jason Steed, managing director of equity research at JPMorgan.

“Most of the flows have been directed towards defensive stocks, with communications services being the preferred destination. This trend is evident through the performance of value relative to growth, the first sharply underperforming since mid-year. “

Telecoms are coming in force

Despite the start of the reopening of the economy in Australia, investors had started to reduce their exposure to cyclical stocks such as Brambles and Qantas.

According to JPMorgan, the proportion of funds with Qantas as the main holding fell to just over 0.4% in October, the same level as in June 2020.

But telecom operators, whose profits are normally unaffected by economic cycles, received a solid offer. “One of the favorites for defensive dial-up has been Telstra, which has seen its proportion of major holdings of equities drop from 3.4% in January to 4.3% today,” Steed said.

Nick Reddaway of Drummond Capital Partners says it will be several weeks before the market has full clarity on omicron’s risk. Eamon Gallagher

“This movement was accompanied by an increase in the manager’s average overweighting to 180 basis points. During this period, the stock outperformed the S&P / ASX 200 of 1,100 basis points. “

But not all investment managers just sit and watch, with some moving quickly to narrow down some of their riskier positions and standing ready to reduce risk exposures further if necessary.

“Shortly after announcing the discovery of the omicron variant, we reduced the equity exposure of our Dynamic Plus fund and closed our short position in US Treasuries,” said Nick Reddaway, Chief Investment Officer of Drummond Capital Partners.

“We also increased our exposure to the Australian dollar to take advantage of improving valuations. No major changes have been made to our strategic portfolios, which already present a low equity risk. As in February 2020, we will further reduce risk in these portfolios if it appears likely that omicron will seriously weaken the macro environment. “

Despite the changes, Reddaway said the fund has already been cautious, avoiding value exposures given its disappointing global growth expectations over the next 12 months. He has also avoided China given its inability to wipe out the delta despite aggressive foreclosure strategies.

“While omicron didn’t seem like the anti-vaccination variant everyone feared, markets were already fragile, having to digest new COVID-19 restrictions in Europe, an increasingly aggressive Fed and the current market slump. Chinese real estate, ”he said.

“Omicron is just another drop on the back of this camel, and it will be several weeks before the market has full clarity on its risk, limiting the rise in equity.”

Reddaway says that, like many others, omicron could actually have a positive impact on global markets. “There is also a bullish scenario where omicron becomes the globally dominant variant, does not escape immune response, and is less severe than delta, which would be a boon to global stock markets. “

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