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Omicron could be good for reopeners, but stay on your toes

Omicron may strengthen the re-opening trade if it turns out to be mild. But investors need to be ready to move quickly as data comes through says MICHAEL BLAYNEY 

INFLATION is the critical issue in financial markets — and consequently how the US Federal Reserve and other central banks respond.

But the Omicron variant of Covid-19 in the short term has created greater uncertainty.

Still, it may not be a negative for markets says Michael Blayney, who heads up Pendal’s multi-asset funds.

Omicron introduces uncertainty because it widens the potential range of outcomes — but there’s also a chance it will strengthen the re-opening trade.

Already on Wednesday we saw a bounce in markets on the back of subsiding Omicron fears.

The risks of Omicron are balanced, Blayney says.

“There’s an outcome in which Omicron is more contagious, but milder and outcompetes Delta.

“That’s the one we all hope for. It would be good for the reopening trade.

“Or there’s the outcome where there’s many mutations and the efficacy of vaccines isn’t as good.”

The emergence of the new Covid variant has complicated the global economic outlook. The most recent inflation reading in the United States shows price rises of 6.2 per cent in the 12 months to October 2021. That’s the highest in more than 30 years.

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Newly re-appointed US Fed chair Jerome Powell has indicated the central bank will taper its bond purchases. Market watchers now expect interest rate increases next year.

“It’s interesting that Chair Powell wants to drop the transitory label from inflation. The Fed is targeting average inflation and now it’s had a bit of inflation, the average shifts up.”

Time to re-evaluate

The change in tack on inflation and the emergence of Omicron should trigger a re-evaluation of portfolio positioning.

“We’ve been a bit more pro-growth for the last 12 months,” Blayney says. “But we have been bringing that back.

“That doesn’t mean going underweight equities. Instead, it’s about looking for relative value opportunities. We like UK equities but don’t like French equities, for example.”

Blayney also argues the benefits of being exposed to higher volatility.

“Part of our investment process enables us to trade instruments on volatility. When you start to see a bit more financial market stress and an uptick in volatility, you can buy instruments that tap into that. We are essentially long volatility exposure.

Underweight bonds

“We are still underweight bonds,” says Blayney. “Bond yields have fallen a bit with some flight to safety as a result of the Omicron variant. But the reality is we’ve got high inflation, tapering and the potential for interest rate rises next year in the US.

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“That creates a backdrop which is quite negative for bonds, and you’re starting off with pretty low yields to begin with.

“Add in the idea that Omicron is actually part of the lessening of the pandemic, there could potentially be big trouble for bonds.”

What’s most important right now is to be vigilant and able to move your portfolio quickly, he says.

“You’ve got to be active and prepared to shift your views and positioning quickly.

“There will be more information on the Fed tapering and Omicron in coming weeks.

“Whatever you position, you need to be willing and ready to move those around as the situation changes.”

About Michael Blayney and Pendal’s Multi-Asset capabilities

Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

The team — which also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Find out more about Pendal’s multi asset funds:

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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