Asset Allocation

Why I am Worried about Omicron B.1.1.529 COVID strain

November 28, 2021

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In all our macro posts, we always talk about how the one thing that can derail all the discussions is a mutated strain of COVID.

And on Thursday, that was exactly what we got, with the new Omicron B.1.1.529 strain.

This could well turn out to be a false alarm, but it is not wise to ignore the threat until we have more information.

Because so little is known about the new strain, we need to approach Omicron like we did with the original COVID back in Feb 2020.

We start by listing out the facts, making educated guesses, then deciding how to position our portfolios.

Facts of Omicron

Everything listed below will be facts only, based on official news reports.

There are 50 mutations on Omicron, 30 of which are on the spike protein used to bind with human cells

2. Omicron has a deletion within the s-gene that means it can be easily distinguished from other variants with conventional PCR tests

Omicron has out-competed delta variant very quickly in South Africa, quickly rising to 90% of all sequenced cases in South Africa

4. Based on genetic sequencing, Omicron does not descend from previously identify variants (eg. Delta). The closest evolutionary connection is to the mid-2020 version of COVID

Governments are not taking any chances. Omicoron has already been detected in Hong Kong, Belgium and UK. Many countries are starting to tighten border restrictions as we speak. Singapore has already banned entry from South Africa. UK has also introduced new measures to combat Omicron.

According to South Africa, no unusual symptoms have been reported following infection with the B.1.1.529 variant and as with other variants some individuals are asymptomatic.

Educated Guesses on Omicron

Ok so those are the facts.

Let’s make some educated guesses based on the facts.

Vaccine Efficacy and Timelines

The spike protein is the element targeted by most COVID vaccines.

30 mutations on the spike protein for Omicron raise the possibility that COVID vaccines may be less effective against Omicron.

According to the vaccine manufacturers, we will know within 2 weeks (based on lab experiments) whether (a) current vaccines are sufficiently effective against Omicron, or (b) a new wave of vaccines are required.

Preliminary comments from BioNTech indicate that that if required, they are able to ship an updated version of the COVID vaccine within 100 days. Note that this is time to shipping, so it excludes the time required to inoculate the population.

Moderna thinks it can get into human trials within 60 days, but is less certain as to when regulatory clearance can be obtained.

Is Omicron more transmissible than Delta Variant?

Breaking it down further, there are 10 mutations on the receptor binding domain for Omicron, which is used by the virus to enter cells. This compares against 2 mutations for the Delta variant.

With so many mutations, it raises the possibility of higher transmissibility.

Early numbers from South Africa are worrying, as Omicron is outcompeting Delta much faster than previous variants.

This was key factor observed for the emergence of Delta variant as well.

Of course, there are many reasons that can explain this data, such as low vaccination rates (28% in South Africa), no significant Delta wave meaning less herd immunity etc.

The rise in transmission can be explained in 2 broad ways:

Omicron is more infectious
Omicron has changed so much that existing immunity provides less protection

We just don’t have the data to confirm this as of yet.

Is Omicron more deadly?

Because Omicron is so new, we don’t have information on hospitalisation / death rates yet.

This will only come to light in the weeks ahead.

According to South Africa, no unusual symptoms have been reported following infection with the B.1.1.529 variant and as with other variants some individuals are asymptomatic.

Will testing be affected?

Fortunately, no.

The deletion on Omicron’s s-gene means it can be easily distinguished from other variants via conventional PCR tests.

What do most experts think?

As it is obvious by now, very little information about Omicron is available to date.

Anecdotal evidence of course, but most of the reactions I’m seeing out of the top virologists are not positive.

The main concern seems to be that due to the number of mutations, there is a possibility of (1) higher transmissibility, or (2) reduced vaccine efficacy.

Until the lab data is out, it is not possible to confirm conclusively either way.

The coming weeks will be crucial.

Why are governments so quick to react this time around?

The big question of course – is that governments know so little about Omicron, but they are acting so quickly.

Compared to February 2020 when it took weeks for border restrictions.

Why the difference this time around? Do governments know something we don’t, or are they once bitten twice shy?

My money’s on the latter.

It makes sense too.

If in 2 weeks the data shows Omicron is a false alarm, you can always open up again.

Whereas if you fail to close quickly and let Omicron in, and it turns out to be a serious strain, you’re going to be in a world of pain.

Given rapidly rising COVID cases in Europe right now, it makes sense to just tighten first and ask questions later.

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How to respond as investors?

Unfortunately, much is going to hinge on the data due to come out in the coming weeks.

There are 2 ends of the spectrum:

Scenario 1 – False Alarm – Omicron turns out to be a false alarm. There is no (or limited) increased transmissibility or lethality, and existing vaccines and treatment remain effective against Omicron
Scenario 2 – Cause for concern – Omicron turns out to be a cause for concern. It has increased transmissibility, is more lethal, and existing vaccines/treatment are not effective.

Of course, these are 2 ends of the spectrum, there is a whole range of possibilities in between. For eg. Omicron may be more transmissible, but no change to vaccine efficacy or lethality.

But for the sake of discussion we will focus on these 2 extremes.

Scenario 1 – False Alarm

This is the simplest outcome.

You buy the dip, and you go back to the exact same asset allocation you were using just earlier this week.

Goldman is in this camp, and they shared their views recently:

“Conclusion: while we do not have sufficient information to forecast a global B.1.1.529 wave, a high rate of transmission almost inevitably leads to a variant dominance. Nevertheless, we can have reasonable degree of confidence that this mutation is unlikely to be more malicious and that the existing vaccines will most likely continue to be effective in preventing hospitalizations and deaths. As such, while we would monitor the situation in Gauteng closely over the next month, we do not think that the new variant is sufficient reason to make major portfolio changes.

Having said that, given the time of the year and liquidity as well as policy risks in December, investors could consider short term hedges for growth sensitive risky assets.” – Goldman Sachs

Scenario 2 – Cause for concern

This outcome is much more tricky because much will depend on transmissibility, lethality, vaccine efficacy etc, and consequently what kind of responses are required from the governments.

The biggest problem with this outcome, from an investing perspective, is inflation.

You see back in March 2020 the world didn’t have an inflation problem. So when the S&P500 tanked 30%, the Feds could turn on unlimited money printing and buy junk bonds, and save the day.

This time around, inflation is a real cause of concern. Inflation has been discussed to death in the media so I’m not going to talk more about it.

The long and short is that under this outcome, further social distancing / border restrictions may be required to combat the spread of Omicron. This will worsen the supply chain disruption, and make inflation sticky for longer.

This will in turn limit the ability of the Feds to go into unlimited money printing, because money printing will only make the inflation problem worse.

The Feds were content to sit by and watch as the market melted up in 2021, so it stands to reason they may be more willing to sit by and watch a market melt-down, as long as the unemployment and inflation numbers don’t move significantly.

So if your response to this outcome is to whip out the March 2020 playbook I would urge you to think twice.

Policy wiggle room is more limited this time around due to inflation, and a lot of the COVID beneficiaries like eCommerce / cloud / semiconductors have already run up significantly over the past 1.5 years.

I think the pain threshold for monetary stimulus is going to be higher this time around.

What do I think?

I think everything will turn on the lab data for this one.

Scenario 1 – If Omicron turns out to be just a slightly different version of Delta, then we back to the life pre-Omicron, and nothing much chances.

Scenario 2 – If Omicron turns out to be more transmissible and vaccines are not effective, all hell will break loose. With limited policy wiggle room this time around due to inflation, it could be very tricky.

The mere possibility of Scenario 2 means that we as investors need to be alive to the risk.

So I think it’s a bit too early to sound the all-clear like Goldman is doing.

We really need to wait for the scientific evidence to come out.

Personally I haven’t made any changes to my portfolio because of Omicron. But I will be monitoring the data very closely going forward.

As shared I’ve already started making changes to my portfolio a few months back because it looks like we’re getting quite late cycle (high valuations, certain asset classes are very richly valued) and heading into a Fed hiking cycle.

So I made some changes then to position for any short term risk off heading into 2022. Full portfolio positioning is available here.

Would love to hear what you think though. Are you worried about Omicron? How are you making change to your portfolio?

I’ve included some of the better sources below so you can do further reading if required.

Do note that this article is written based on information available as of 28 Nov 2021, and will not be updated going forward. For my latest views and portfolio changes do check out Patron.

Note: This is a Premium Article available exclusively to Patrons. Making it available given the potential importance of this topic.