The World Health Organization’s (WHO) classification of the new Covid-19 variant, Omicron, as a “variant of concern” on Nov 26 sent shock waves around the world. Governments rushed to ban travellers from South Africa and several neighbouring African countries, where the variant was initially discovered. Major developed nations were among the fastest to react, despite their high vaccination rates — a sure sign that nearly two years into the pandemic, the world remains extremely jittery.
Unsurprisingly, stocks fell sharply as panicked investors rushed to sell. The closely watched Dow Jones Industrial Average suffered its worst day since October 2020, falling 2.5% in an immediate kneejerk reaction. Bond yields, which are inversely correlated to prices, fell as expectations for rate hikes were pared back with these latest worries. So, how worried should we be?
The biggest concern about Omicron is its high number of mutations — about 50, including 32 changes to the spike protein, which is the main target for vaccine-induced antibodies. Preliminary data indicates higher odds of reinfection, which suggests that Omicron could be more effective in evading the body’s natural immunity. Other than that, little else is known — whether it is more transmissible than other variants, more virulent, more able to evade existing vaccines and therapeutics (the high number of mutations implies this is likely but the key question is, to what degree) or less detectable with current rapid test kits. We are told there will be more definitive information in about two weeks.
This is also unsurprising. The truth is that there is more that we do not know about the Covid-19 virus than what we do know. All living beings, including humans, have evolved and continue to do so. Mutations that give a variant some advantages in the prevailing environment will succeed and its descendants will come to dominate. Predator and prey species evolve in lockstep, one in response to the other. This is nature.
Similarly, viruses and the human immune system have been locked in an arms race throughout history. The Covid-19 virus has already gone through many iterations, some of the higher-profile variants being Alpha, Beta, Gamma and the fittest, thus far — and therefore the dominant strain today — Delta. Omicron is the latest variant and quite certainly not the last.
On a more upbeat note, there are some viruses that have evolved to become less virulent over time, even if they become more contagious. From an evolutionary point of view, a highly successful virus is one that has a long period of contagiousness that enables it to spread widely, by adapting to but not killing its hosts. For instance, the influenza virus responsible for the 1918 Spanish flu has evolved into less dangerous strains. They are still deadly for some people but far from pandemic proportions and no longer trigger panicked reactions. The influenza virus continues to mutate, which is why we take “updated” vaccine shots each year. The same could be true of the Covid-19 virus, though not necessarily so.
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Viruses could also become less deadly over time, not because they are less virulent but because there is built-up immunity in the population from past infections — for example, the four common human coronaviruses that cause the cold. It is exceedingly difficult to predict Covid-19’s future evolutionary path, which will further depend on environmental factors, including how we respond. Hence, the high degree of uncertainties. What we do know is that we would never bet against humanity’s ingenuity, our ability to adapt and innovate quickly.
The world developed and manufactured highly effective vaccines for Covid-19 in record time. The discovery and classification of Omicron unfolded within days. Teams of scientists in multiple countries are already conducting studies and tests on this variant. The mRNA technology used by Pfizer and Moderna can quickly reformulate existing vaccines, if necessary. The process of inserting the genetic sequence of a virus into the basic platform is relatively simple and less time-consuming compared with traditional vaccine methods. Reformulated vaccines could be available at scale within three to four months.
That said, it is completely understandable if you wish to take some money off the table, especially if you had made big gains in the rally since markets hit the pandemic lows in March 2020. US stocks staged a partial rebound last Monday, recouping part of the losses on Black Friday, but then gave all that back, and more, on Tuesday. We cannot predict if stocks will continue to decline or rebound tomorrow, next week or even next month.
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We think there would be heightened volatility in the short term, as more information is known about Omicron. In the worst-case scenario, Omicron could lead to another surge in Covid-19 cases around the world, which would dampen the current economic growth expectations. But, if the past two years have taught us anything, it is that all the virus variants, thus far, come with expiry dates. What do we mean by this?
Take California as an example. The new cases and hospitalisation rate rose sharply through July 2021 and hit a peak at end-August, driven by the highly infectious Delta variant — particularly among the unvaccinated. But the numbers have since fallen precipitously. It should also be noted that the death toll in this latest outbreak cycle has been far lower than the previous surge in cases, in January 2021, when vaccines were just being rolled out. Vaccines remain our best defence against this virus.
As long as a large number of the world’s population remains unvaccinated, they are fertile ground for rapid mutations and the emergence of new variants, some more benign and inconsequential while others will be variants of concern. In other words, this pattern of ebb and flow in cases will likely be repeated numerous times around the world. This may be great for trading stocks — provided, of course, you can consistently time the market accurately, which is highly unlikely — but makes little sense for longer-term investors.
History has proven that buying and holding stocks over long periods of time has never done investors wrong — even if you had bought on the eve of major market crashes. We wrote about this in our article entitled “Only a fool would call a market top” (Issue 1366, April 19, 2021). Stocks have always, through the lens of history, inevitably recouped all lost ground, and much more.
Sidebar: Many Malaysians aged 40 and above will fall into poverty on retirement
The threat of a looming retirement crisis and old-age poverty for Malaysians is very real. The savings rate for the average Malaysian has been in a consistent decline for more than a decade, to a 30-year low, while household debt has risen sharply. As if rising personal debts — including racking up loans on credit cards — are not bad enough, this very same group of people, poorer and addicted to debts, is now told that “buy now pay later” (BNPL) is good for them. BNPL will simply compound their hardship in the years to come. The hard truth is that we have been living beyond our means, as wages fail to keep pace with the cost of living.
The financial situation for those in both the B40 and M40 groups has been made worse post-pandemic, following more than RM100 billion in emergency withdrawals. The median savings for the 14.9 million contributors to the Employees Provident Fund (EPF) — the mandatory savings vehicle for all private sector workers in the country — have fallen to only RM13,000.
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This is far, far short of the RM240,000 EPF considers the bare minimum savings upon retirement, which works out to about RM1,000 a month for the next 20 years. Even then, this amount is well below the RM2,700 threshold that Bank Negara deems a “living wage” (see Chart 1). As it stands, only 1.7% of the 14.9 million EPF members have more than RM500,000 in their accounts (see Chart 2).
For sure, some would have other assets (for instance, a home) and savings outside of EPF. And the younger contributors still have time to top up their savings, through future monthly contributions. But for those nearing retirement age, time is fast running out. A case in point: The median EPF savings for people aged 40 and above range from only RM40,000 to less than RM50,000 (see Table 1). Table 2 shows the comparative statistics for Central Provident Fund Board (CPF), the savings and pension fund for Singaporeans. Bear in mind, these figures have not taken into account the fact that most Singaporeans own a home, at least in the form of an HDB apartment.
In summary, unless radical measures are taken today, large sections of the Malaysian population will be in serious trouble over the coming 20 to 30 years. Make no mistake, they will fall into poverty in old age.
- End of Sidebar Piece -
The Global Portfolio declined 5.2% for the week ended Dec 2. Travel-related shares, including Airbnb (-9.3%), Singapore Airlines (-8.2%) and Mastercard (-9.9%) were heavily sold off as worries over Omicron escalated. There was only one stock that gained last week. Apple was up 1.7% to an all-time record high, as investors see it as a relative safe haven. Last week’s decline pared total returns since inception to 59.5%. This portfolio is outperforming the benchmark MSCI World Net Return Index, which is up 57.1% over the same period.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
Photo: Bloomberg
