Interactive Investor

Omicron recovery is a lesson to every investor

8th December 2021 15:14

Graeme Evans from interactive investor

A new Covid variant has the power to send stock markets crashing, but also offers an opportunity to make a 20% profit. Here’s how.

The golden rule about not acting in haste during stock market turbulence has paid off after shares including BP (LSE:BP.) and BT Group (LSE:BT.A) moved above levels seen before the Black Friday slump.

This week's turnaround for the FTSE 100 index has been rapid after experts indicated that the Omicron variant is not as severe as initially feared at the time of the 26 November market rout.

Eighteen stocks in the FTSE 350 index have since rebounded by double-digit percentages, led by consumer reviews business Trustpilot (LSE:TRST) with a 21% gain.

Wizz Air (LSE:WIZZ) and Restaurant Group (LSE:RTN) are also 16% and 14% higher respectively, despite sentiment being hit today by the prospect of prime minister Boris Johnson unveiling Plan B measures to curb the spread of the new variant.

Hopes that economic demand will remain robust have lifted the oil price to $75 a barrel and helped BP back above the 344.75p seen before shares reversed to 317p at the end of November.

De Beers miner AAnglo American (LSE:AAL) and rival BHP (LSE:BHP) are more than 10% higher since the evening of the sell-off, aided by the revival in commodity prices and yesterday's release of reserves by China's central bank in an effort to boost economic growth.

BT Group shares have been as high as 172p, having reversed from 161p to 154p on 26 November. The rally follows reports of a potential sports joint venture with America's Discovery and comes ahead of Friday's expiry of Takeover Panel rules preventing billionaire investor Patrick Drahi from increasing his stake.

The blue-chip revival means the FTSE 100 index is back within 30 points of the post-pandemic high seen in mid-November, while Wall Street is close to setting fresh all-time records after the S&P 500 finished 2% higher on Tuesday.

Initial data from South Africa, which has been at the centre of the Omicron outbreak, point to the variant causing milder symptoms than the previous Delta wave.

GlaxoSmithKline (LSE:GSK) also said on Tuesday that its Covid-19 antibody treatment, developed with US partner Vir Biotechnology, was effective against all the identified mutations.

This optimism has shifted investor focus away from Covid-19 and back towards economic factors, particularly the inflation outlook.

UBS Global Wealth Management believes indications on the current state of the US economy remain encouraging and that the swifter pace of monetary tightening by the Federal Reserve has already been factored in by markets.

Wall Street is braced for three quarter-point increases in interest rates in 2022, but this position could change if Friday's inflation figure for November is above the expected spike of 7%.

UBS said investor positioning now looked to be a tailwind for markets amid signs that hedge funds are looking to add back risk on the renewed positive momentum.

Mark Haefele, UBS's chief investment officer, said: “The equity rebound over the last two days is a reminder that hastily exiting positions at the height of market anxiety has the potential to damage returns.”

UBS expects equities to resume their upward course, and for some of the cyclical markets particularly negatively affected by recent developments, such as Japan, the eurozone, energy, and financials, to outperform.

Haefele added: “Recent moves are also a reminder of the importance of building a well-diversified portfolio, both geographically and across asset classes.”

He recommends investors should balance a pro-cyclical stance with exposure to more defensive sectors, such as healthcare, and further diversify portfolios with exposure to alternatives including hedge funds.

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