Share markets have tumbled globally in response to the latest variant of COVID-19, including the biggest fall of the year for the Dow Jones last Friday.
The ASX recorded a 1.7 per cent drop on Friday with losses extending into the start of this week.
AMP Capital chief economist Dr Shane Oliver said that stock markets worldwide had been quick to respond despite limited research into the Omicron variant.
“Markets have taken this view, the case of shoot first, ask questions later, and so we’re really dependent on getting more medical information regarding it,” he said.
“The trouble is, it’s going to take a week or two before we can assess the situation clearer.”
Also addressing the issue, VanEck head of investments and capital markets Russel Chesler agreed that the next few weeks would be critical in determining the impact of the new variant.
“There are lots of unknowns when it comes to Omicron, but one thing is for sure, markets are going to be volatile, especially as the virus spreads and governments react with travel and social and restrictions,” he said.
Whilst early indications suggest Omicron is more transmissible, it is not currently known whether it is more harmful or how vaccine effectiveness might be impacted.
“Markets have sold off obviously on fear that it will set back the global and Australian recoveries with more lockdowns and so on, and obviously every time there’s a new travel restriction, it adds to this fear factor,” said Dr Oliver.
“If travel restrictions are the worst of it, then it’s horrible for travel and leisure companies and that has an immediate reaction in the share market.”
Mr Chesler also warned that additional restrictions could push back the global economic recovery, which may see stock markets stall over the coming months.
“But quality companies could outperform, as they tend to offer investors protection during weaker economic environments and heightened uncertainty and market volatility,” he said.
“Quality companies have a high return on equity (ROE), stable earnings growth and low financial leverage, and these companies tend to fall less and recover more quickly than the broader market.”
Economic implications
Dr Oliver noted that there was a tendency to exaggerate the impact that international border openings and closures have on the Australian economy.
“The reopening is more of a net negative for the economy in terms of international travel,” he said.
“Australia has a trade deficit normally in tourism, so it’s almost certain that we would have lost more people from a reopening of the borders to overseas than we would have gained from tourists coming here.”
In comparison to vaccination rates in many other developed countries, Dr Oliver said Australia was better prepared with more than 72 per cent of the total population now fully vaccinated.
“The fact that we’re more vaccinated than most other developed countries is a good thing, and the vaccines were relatively recent because we started late, which means that their effectiveness should be higher,” he said.
“That of course assumes the vaccines offer good protection.”
Dr Oliver said that Australia was also better placed in terms of contact tracing, managing lockdowns and restricting people entering the country due to having no land borders.
“We still haven’t got it under control yet, but you could argue there is more reason for optimism than there was a year ago,” he said.
In the past, viruses have often mutated in ways that have enabled them to survive, and Dr Oliver suggested that this could also be occurring with the coronavirus, which may be mutating to have milder symptoms which ensure the host remains alive.
“We may be coming into an environment where we are able to learn to live with it, because it becomes milder and the vaccines still help, in which case, it starts to have less and less of an impact beyond obviously short-term setbacks,” said Dr Oliver.
“The alternative is that, if it causes more severe illness, then it’s a lot worse. Either way, it’s just a reminder that it’s still a factor that can threaten markets as we go into next year.”
