The market fluctuation caused by Omicron is not expected to continue: we expect that the overseas market will remain volatile in December 2021, and the market transaction will mainly focus on the number of confirmed cases of Omicron and the latest information of vaccine. At present, the market panic mainly comes from the unknown. In December and early 2022, global investors will further master the transmission speed of Omicron and the effectiveness of the existing vaccine. At the same time, with the launch of the vaccine, the adaptability of the global economy to the epidemic has been greatly enhanced, and we expect that the path of recovery will not be significantly impacted. When the delta virus variant caused the last round of epidemic panic in July 2021, the stock index and oil price once fell sharply, the bond yield curve tended to be flat, and the market predicted that the major central banks would reduce the number of interest rate increases. However, in a week or so, the market impact caused by delta virus almost completely subsided. We expect overseas markets to rebound after the December volatility has passed. The upward logic of global economic inflation expectations is not expected to change.
Compared with the delta virus panic in July 2021, several risks need to be noted:
1) The monetary and fiscal policy environment has changed. During the delta panic in July, the Federal Reserve guaranteed that the policy interest rate would remain at 0%. Although the interest rate is still in the same position, QE has begun and accelerated in December. Accelerating taper means that the table contraction may end early in March 2022, and the interest rate increase may start early.
2) The panic caused by Omicron may be different from the delta period. Because this is the second virus mutation with great risk, investors may tend to think that dangerous virus variants will continue to appear in the future, which may have some different effects on demand and market sentiment.
3) The effect of Omicron variant on the health of infected people may be different from other variants before. The infectivity of Omicron may be higher than that of the previous virus variants. As of November 30, the data of South Africa showed that 10% of patients were infants under the age of 2, indicating that Omicron may have a greater impact on children and adolescents than the previous variants. Due to the low vaccination rate of adolescents, the follow-up epidemic development is still uncertain.
It is not clear that Omicron will increase or reduce inflation risk: as China will adhere to the clearing policy, it may exacerbate the existing global supply chain problems and increase inflation pressure. But at the same time, if Omicron does have higher infectivity and drug resistance, the blockade policies in Europe and the United States may continue to be tightened, resulting in a decline in demand and the possibility of deflation. In addition, although residents' consumption in overseas economies is still relatively strong, the consumer sentiment index has begun to decline. If the epidemic development this winter exceeds expectations, it may hit residents' consumption expenditure. The impact of Omicron on inflation risk remains to be seen.
The development of the epidemic is difficult to curb the rise of global inflation, and the risk of stagflation is still the theme: the focus of overseas investors has shifted to the fear of stagflation. In overseas markets, we have observed a significant upward trend in global short-term government bond yields and a significant downward trend in prices. At present, rising energy prices are the main source of inflationary pressure in many economies. However, we have observed that inflation in overseas economies has begun to spread beyond energy commodities. The shortage of workers, shipping congestion, overburdened ports and other factors caused by the outbreak of the epidemic have significantly increased the cost of manufacturing supply chain in the global market. If the worst-case situation of the epidemic occurs, the number of global confirmed cases surges and overseas governments introduce more stringent epidemic prevention requirements, which may lead to significantly lower economic growth than expected and the risk of stagflation. Under the pressure of supply, we suggest to select industries with sustainable future profit growth and controllable supply chain costs in overseas markets, and pay close attention to valuation to avoid paying too high premium for uncertain profit growth. It is suggested to pay attention to the pharmaceutical, Internet and real estate industries.
Risk tip: Omicron caused the confirmed cases of global epidemic to exceed expectations, and the epidemic prevention measures were upgraded, which had a negative impact on economic growth. High prices superimposed on the decline in economic growth, and overseas economies entered stagflation.
