November Performance Review & Omicron Update…

November was progressing very nicely until Omicron turned up the heat in the last week of the month. The deluge of media coverage that has followed has concerned investors, and there has been some market volatility as a result. Our portfolio’s hit all-time highs in mid-November, though they have since retreated a little since Omicron’s arrival on the scene.

Following the strong start to the month, our investment team decided to reduce equity risk by around 6-8% in the lower risk portfolios, and 2-3% in the higher risk, taking the view that the winter might hold more threats than opportunities, and on the back of a good year-to-date, it seemed prudent to take some profit. We have to say that at that point we knew nothing of the new variant, so this was a well-timed reduction. A little lucky some might say, though we will take that!

As always, we have a wide range of forward scenarios from here, and as the data comes in, they will be quickly narrowed down. Our base case currently is that Omicron has some advantages over delta, though it seems unlikely that it has a significant advantage when it comes to causing severe disease, which is arguably the most important property. In addition, to our advantage we are a highly immunised population in the UK, which will help us whatever situation this variant causes. So although it really is hard to say at the minute, we have more in our favour now than in 2020.

The best plan we feel, particularly having already trimmed risk in advance, is to hold course and wait for more concrete evidence. That’s the sensible thing to do whenever you are faced with an uncertain risk, and its worth remembering, thanks to the wonders of science and data-analysis, we will know very quickly how much (or little) will change over the next few months.

As far as markets are concerned, it seems difficult to see a scenario where Omicron causes anything more than a few wobbles in aggregate. Take the reasonable worst-case scenario – restrictions need to be brought in for 3-6 months while vaccines are adapted – we’d once again see policymakers respond with more furlough and money printing. Moreover, whilst there would no doubt be sectors that would once again suffer (e.g. retail, leisure and travel), those sectors of the economy which are more digitalised, would benefit.  More stimulus would again provide investment opportunity, providing further room for upside once we’ve adapted to get ahead of the virus once again.

Despite that optimism, our plan was to revert to a more cautious position across the portfolios range over the next few months. Whilst we have lost some ground from our portfolio highs, for November as a whole, they returned between -0.78% (High Risk) and +0.17% (Very Low Risk), comparative to the FTSE 100 Index which returned -2.17% for example. We have a good holding in cash positions as a result of taking some annual gains, so we feel we are well placed to take advantage of whatever opportunities come our way.

Looking forward, the next few weeks will be important in determining the direction markets take over the winter and into the spring. There are reasons to not be too down-beat, though we must wait for more clarity before we can really adjust our perspective.