Global risk assets fell sharply towards the end of last week amid spiking fears about a new Covid-19 variant which appears to be spreading faster than the previous Delta variant. Risk sentiment within financial markets has subsequently suffered over the past few days, as investors look to take risks off the table due to short-term uncertainty. While the portfolios fell, the high cash levels within the OBI portfolios mitigated the extent of the sell-off over the week, helping to protect 2021 gains as we approach the year-end.
Omicron Reminds Investors of Pandemic-Related Threats
Before the emergence of the Omicron variant, equity indices across the globe were on track to post a stellar year of financial returns. While there could still be room for equities to run over the coming weeks, investors are pricing in increased uncertainty throughout December as they await vaccine efficacy and virus contagion updates, which may determine the economic reopening narrative throughout the short term.
The Omicron variant has since been identified in 23 countries so far, with the US becoming one of the latest countries to announce that it has its first case. The variant, which reportedly has more than 30 mutations from the original variant, is yet to be fully understood by medical professionals. With more to learn about the latest variant, governments have been increasingly deliberating the prospect for renewed lockdowns and public health measures to combat the transmission of Omicron, which in turn has led to investors pricing in lower demand for certain goods and services. The elevated volatility can be characterised by the latest VIX index score which stands at 29.29, a 10-month high. While we cannot predict what will happen or how this will play out, we do think the next two weeks could be highly volatile for risk assets.
While the OBI portfolios have been negatively impacted by the pullback in risk assets, the portfolios have fared better than the equity indices and benchmarks throughout the weekly time frame. This is due to the elevated cash levels of c.30% which has allowed us to take risk off the table as we park our capital in a risk-free asset over the short term.
That being said, while we have seen risk assets fall since Friday 26th November, we remain confident that we will begin to redeploy our cash levels in stages from mid-December onwards. This has always been the plan, and while the emergence of Omicron had not been anticipated, we expect the improvement in pandemic-related clarity or the possibility for further sharp falls in risk asset prices to provide us with the opportunity to redeploy cash levels at attractive entry points within financial markets. In addition, by redeploying our cash in stages between mid-December to the end of January, we can diversify away some of the risks from subsequent falls in risk asset prices, while allowing us to identify attractive investment opportunities over the next few weeks. We will continue to analyse the “Value at Risk” equation for each opportunity, ensuring we can mitigate unsystematic risk where possible.
While other risks remain in the short term (central bank policy decisions, labour data, economic data flows), we believe the Omicron variant has become the main headwind as 2021 comes to an end. However, we want you to be resting easy as this year comes to a close, knowing that the portfolios continue to be in a good position, both from an asset allocation point of view and an annualised performance point of view. We will be holding our quarterly Investment Committee Meeting in mid-December, and we are looking forward to identifying new opportunities for the OBI portfolios that are well-positioned for the continuation of mid-cycle dynamics throughout 2022 and beyond. For further information on the outlook for some of the key themes in 2022 that will be considered in our next ICM meeting, please see the market update attached.
Portfolio and Risk Asset Performance
All of the equity indices monitored in the table below fell over the week, ranging from -1.33% to -6.70%. US equities particularly suffered upon identifying their first Omicron case given that asset prices have remained stretched for much of 2021, making them susceptible to a pandemic-related selloff. In addition, policy tightening risks are beginning to be priced in as a result of Jerome Powell’s expectation to tighten asset purchases faster than previously anticipated. UK equities fared better than their continental European counterparts as a result of attractive valuations, strengthening long term growth outlook, and a stable daily Covid-19 case rate. European equities have subsequently suffered from the acceleration in Covid-19 cases, while Japanese equities have been particularly susceptible to Omicron news flows in recent days. China fared relatively well in comparison to other regions analysed, however, this is likely due to the already discounted valuations within the region.
Aside from the Sterling High Yield sector, the remaining non-equity sectors analysed have gained throughout the week amid the risk-off sentiment within markets. The strongest performer has been index-linked gilts, which have benefitted from recent inflation and political news flows.
All of the portfolios subsequently fell less than their benchmarks in the weekly time frame, largely due to our higher cash levels. We expect this trend to continue over the coming weeks if risk assets continue to suffer, however, we remain confident that the portfolios will finish above their annualised return targets again by the year-end.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment. OCM Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Registration No: 418826) OCM Asset Management is a trading name of OCM Wealth Management Limited.
Key Events We Are Watching This Week:
- Tuesday 7th: EU GDP Growth Rate, Q3.
- Friday 10th: US Inflation Rate, November.
This Day in History
On this day in 1982, Barney Clark became the first person to receive a permanent artificial heart. The surgery occurred at the University of Utah Medical Center. Clark lived for 112 days after the transplant.
Thank you for reading, have a great week!
Jason, Gina & Ben
