When news of Omicron first broke two weeks ago investors immediately allocated to gold and government bonds, seeking out protection from a potential Covid fallout, but some commentators warned they may have acted too soon.
Rachel Winter, associate investment director at Killik & Co, noted that in the days immediately after the news, the price of UK and US government bonds and gold all rose, implying that investors were “moving into safe haven assets”.
Indeed, 10 year gilts’ yield is currently at 0.74%, down 10 basis points on where it was a month ago, while US treasury yields fell from around 1.64% to 1.4% currently. The gold price meanwhile is up 4.4%.
Markets had a visible reaction to Omicron, with the FTSE 100 falling 3.6% and the S&P 500 down 2.3% at the open the day after the news broke. Brent Crude was also down 5.5%, taking a hit from the immediate travel restrictions announced to try and control the new variant’s spread.
Performance of global indices 25/11/2021 to date
Source: FE Analytics
These were not as steep declines as the record levels experienced last March when Covid cases initially escalated, but the recent memory of that event has evidently spooked investors now.
Laith Khalaf, head of investment analysis at AJ Bell, said it was “natural” for investors to seek out safe havens when bad news breaks “and the emergence of the Omicron variant is certainly that”.
Although understandable, this is quite an early response given that the scientific analysis into the variant is still in the very early stages and not much is known about how problematic it could truly become. Whether or not this was the right move will depend on how vaccine resistant Omicron is proven to be, or not.
If governments and pharmaceutical companies “make some reassuring noises in the next few weeks, we should find that flight to safety reverses somewhat”, Laith said.
But if investors’ worst fears are confirmed and Covid becomes a much bigger problem again “we should see safe havens perform even better,” he said.
“The big thing investors are going to be looking for is any indication that we’re heading back to significantly more severe social restrictions,” Laith added.
“A bit more mask wearing isn’t a problem for markets, a renewed mothballing of travel, retail and leisure certainly would be.”
This marries with the views of Jean Boivin, who heads the BlackRock Investment Institute. Last week he told Trustnet that the firm remained bullish on equities despite the new, highly contagious strain of coronavirus, as there was no evidence yet that vaccines are ineffective.
Emma Wall, head of investment analysis at Hargreaves Lansdown, said that the best thing to do when markets fall like they did in the wake of Omicron is to “hold tight”, even if it is “incredibly tough”.
Wall said that although Omicron is having a measurable impact, particularly in consumer exposed equity sectors, such as leisure, travel, entertainment and retail “making portfolio allocation decisions on passing headwinds is not sensible”.
“Look at the downturn of last March – it was difficult to stomach, but markets rallied afterwards – with US stocks subsequently hitting to all-time highs. Focus on your long-term goals and look through the noise,” she said.