Omicron Could Hit China Markets Harder Than The West – Here’s How Investors Are Responding
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Omicron Could Hit China Markets Harder Than The West – Here’s How Investors Are Responding

30th November 2021 | 5 min read

In a twisted case of March 2020 deja vu, fears of heightened restrictions are resurfacing as the new Omicron coronavirus variant threatens our so-called resilient vaccines. Ever sensitive to uncertainty, the stock market has crumbled in the face of a potentially bleak outlook.

Although the World Health Organization has declared it is not yet clear whether Omicron is more transmissible compared to other variants or causes more severe disease compared to infections with other variants, accelerated hospitalisation rates in South Africa have sent red flags to governments around the globe.

Israel is already banning all foreigners from entering the country for 14 days, pending more information about Omicron, whilst Morocco is stopping all incoming air travel for two weeks.

Markets have also responded drastically to the new variant. Wall Street suffered its worst day in over a year on Friday, with the Dow Jones Industrial Average briefly falling more than 1,000 points following news Omicron.

Dow Jones Industrial Average, 5D (Data: TradingView)

As the world braces for Covid Pandemic Part II, investors are questioning whether to pull their recovery gains or capitalise on the skittish markets.

Omicron Warning

Whilst it’s far too early to predict the severity of the newest iteration of Covid saga, it’s worth noting how investors around the world are reacting to the new variant.

In Credit Suisse’s latest investment strategy note, Global Chief Investment Officer Michael Strobaek warned how the bank is anticipating increased instability in the market.

“The global CIO note highlights the bank’s view on how market volatility is likely to persist until more facts about the new COVID-19 variant (B.1.1.529) in South Africa are known after the news of its spread caused sharp risk-off moves in financial markets on 26 November”, Strobaek’s note said.

On Monday, uncertainty and volatility continued to hamper the market with ongoing concerns surrounding the new Covid variant Omicron. In Asia, the Shanghai composite was down around 0.4% and the Shenzhen component closed flat. However, US stock futures rose late on Sunday, suggesting some optimism.

Asia Is More Vulnerable

Unlike human beings, the coronavirus does not discriminate in terms of who it infects. However, analysts believe the new variant could affect Asian markets more than their Western counterparts.

Peter Rutter, head of equities at Royal London Asset Management, explained that the market isn’t scared of the virus itself but how governments will respond.

“It’s not the virus itself that market fear, but policy reactions to the virus”, he added. “If there are new restrictions or enhanced restrictions on activity, then we could see some spillover into the next week and month”.

Rutter added that western governments may not respond as harshly as China’s. “Some countries, like the US and UK, might not react to it as much as countries like China with their zero-Covid strategy”, he said.

As the UK and US have already swung closer to normality than conservative mask-mandating Asian governments, Rutter’s argument certainly holds water.

Mark Williams, chief Asia economist at Capital Economics believes China will likely “double-down” on its zero-Covid approach.

“The spread of highly transmissible variants may ultimately make the strategy untenable. But in the short-term, the authorities are more likely to double down”, he said. “Intermittent local lockdowns will continue to hit activity directly, while worries of being flagged as a close contact will keep many people at home”.

Helen Zhu, managing director at Hong Kong-based investment firm Nan Fung Trinity agreed.

“If omicron turns out to be a major threat, I think China will certainly continue to lengthen the period of staying isolated”, Zhu said.

The market appears to share similar sentiment towards China. On Monday, YANG, a daily 3x inverse leveraged exposure to a market-cap-weighted index of the 50 largest Chinese stocks traded in Hong Kong, surged over 8.5%.

Reactionary Plays

Retail investors are thereby placing call bets on $YANG. “Going to enter these next week but I think China is a terrible position to handle another covid wave and lockdown. Evergrande has credit markets shook-up already, compounding that with the crazy shit they’ll try to do to contain it and markets could flip the fuck out (like welding apartment doors shut with residents inside)”, said one Redditor.

However, same Reddit user also has little faith that the US will necessarily perform any better than China, and has declared to place puts against the S&P 500. “Spy puts for monday”, the Redditor wrote. “I think the odds are high that at a minimum more cases will be discovered in more countries over the weekend which should at least cause a good dip monday morning. If they designate it as a VOC after hours today, I think those will really print”.

In another thread, one WallStreetBets member posted how they made over 850% gains in puts against the S&P 500. “Thanks Omicron!!” the thread simply read.

Image credit: WallStreetBets

BioNTech appears to be the most popular long game played by the WallStreetBets community. Having already surged 14.19% to USD 348.00 on Friday, the German biotechnology company is expected to reach USD 450 soon, with a longer term target of USD 650.

Bread’s View

Eli Lee, Head of Investment Strategy at the Bank of Singapore, warned it will take “2-3 weeks” to “shed more information on the transmissibility of this variant” and that it could take “6-8 weeks for the impact on hospitalisation rates and deaths to become clear, based on past experience with the Delta variant”.

With this in mind, it’s far too early for us to make drastic moves. Unlike some of the WSB crowd, we’re neither ballsy enough nor short-term enough to place reactionary puts and calls. Instead, we’ll be looking at companies positioned to grow irrespective of when, how or whether the pandemic ends.

One sector that we’ll be exploring more in the upcoming weeks is the Metaverse. Covid Pandemic 1.0 saw stay-at-home stocks such as Netflix and Zoom surge, but wilt away as pandemic restrictions lifted. The Metaverse, which has drawn increasing attention can serve as a stay-at-home play and a long term investment into shifting behaviour towards technology and entertainment.

Set to revolutionise the digital landscape, we’re excited to see the potential the Metaverse can bring to both tech and investment tables.

Nonetheless, we’ll be closely watching how the Omicron saga unfolds and will continue to update our readers about any moves we’re making in response.

Written by Cohan Chew

Having co-founded Europe’s biggest East Asian culture website (WeAreResonate.com), Cohan has since ventured into East/West equities. His writing background includes Seeking Alpha, The Motley Fool, Capital A, Time Out Singapore, The Huffington Post, Gigwise and Redstar Qingdao.

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