Introduction

Unfortunately, we have been hit by another COVID-19 variant that is spreading fast across the world – omicron. Whilst there is still a lot of concern and uncertainty around it, there also might be a hidden opportunity for FIRE investors

Firstly, identified in South Africa, Omicron has already been detected in people in the UK, Germany, Italy, Netherlands, Denmark, Belgium, Australia, and a few African nations.

It is disappointing to have another virus mutation spreading just before Christmas – we might have another lockdown during Christmas time in Sydney, which is frustrating.

It is still early days, and the severity of infections are still being studied by experts. Apparently, Omicron’s infection rates are much higher than delta, and gamma and the World Health Organisation (WHO) has declared that variant B.1.1.529 is a variant of concern.

“Preliminary data suggests that there are increasing rates of hospitalization in South Africa, but this may be due to increasing overall numbers of people becoming infected, rather than a result of specific infection with Omicron.  There is currently no information to suggest that symptoms associated with Omicron are different from those from other variants.“

World Health Organisation (WHO)

Threat – the impacts of Omicron

In Sydney, so far, it is business as usual. We have already identified a few cases here, which are being closely monitored by health authorities.

After a long year with multiple lockdowns and extremely challenging working loads, I was extremely excited to take a 4-week break and refresh my mind with an overseas trip to visit part of my family.

Unfortunately, I decided to cancel it. I felt it was too risky to leave Australia with all the uncertainty around what is going to happen.

Australia is an extremely rigid country when we are talking about border controls (which I think is good), and things might get tricky on my way back. I was worried about not being able to come back to Sydney.

Even though I am staying in Australia, there is always the chance of a new lockdown wave, which annoys me. I am trying to figure out new plans, but for the time being, I will now stay around and enjoy the summer season in Bondi, which is not too bad as well.

Impacts of Omicron on Financial Markets

Financial Markets have already reacted to the new outbreak. The stock market indexes have dropped, and volatility has significantly increased over the last few days.

Some preliminary information (but not conclusive yet) shows that omicron symptoms and severity might be milder than delta, bringing some relief to investors’ panic.

The initial concerns are that new waves of lockdown can be triggered, directly impacting mobility restrictions, consumerism, and market confidence levels, translating into heavy economic damages.

Some countries, as Netherland and Austria, have already adopted hard measures and imposed restrictions to avoid the spread of the new variant. In Australia, when I am writing this post, we are still on “wait and see” status, but things tend to change quickly over here.

My FIRE portfolio has been affected by the recent market movements. A minor market correction dropped its value down – I am not too worried about that, as I invest considering the long-term prospects (see this post to check how I invest in stocks). 

Opportunities arising together with Omicron

As with every issue in our lives, we sometimes need to change the optics and see the “problem” from another angle.

It might be the case that omicron evolves in a bad way, and things go south in the short and medium-term in the financial markets. Indexes might sharply decline, and your portfolio value might deteriorate (momentarily).

In moments of crisis, investors panic, and some incredible opportunities arise from these volatile environments.

“Correlations go to one”

There is a famous say in financial markets that during a crisis, “correlations go to one”. 

In statistics, the correlation coefficient measures the linear association of two variables and ranges between -1 and 1. In summary:

• If stock A goes up 1% and stock B also goes up by 1%, we can say that stock A and B have a perfect correlation of 1 – assets more in the same direction and proportion.
• On the other hand, if stock A goes up 1% and stock B goes down by 1%, they have a perfect negative correlation – assets move in the same proportion, but we are in opposite directions. 
• A zero correlation indicates no linear relationship between the two assets. 

The correlation is an essential tool for portfolio management. It can help you manage your portfolio risk through strategic diversification and allocation, but this is a topic for another post.

During a financial crisis, investors tend to panic, and there is a massive selling movement, which significantly increases the offer, whilst the demand remains very low.

Following the primary demand and supply rule, the consequence is that prices drop and tend to trend at very attractive quotations. This happens with almost every asset available in the market, which leads to the famous phrase “correlations go to one”.

Buy the DIP!

Whilst some businesses can be heavily impacted by new shocks coming from the spread of omicron, others can benefit from it.

For example, I have never heard about the software Zoom until COVID-19 crisis. Now, I use it every week for business and work meetings. Zoom has benefitted from the pandemics and has significantly grown its revenue during this period.

On the other hand, airlines have suffered (and are still suffering) with all travel restrictions. The list of bankruptcy only grows in this sector.

Even though the effects are entirely different on each business, share prices suffer from the uncertainty of possible lockdowns and onerous restrictions. If lockdowns are imposed again, I am 100% sure that we will have a massive market correction and we should be prepared to make the most of it.

This means having some liquidity to invest while the market is melting, and understanding which sectors and companies are less affected by this event.

During the 2020 lockdowns, I had the guts to pour money into the stock market and buy the dip! For those who are not familiar, buy the dip is an expression created by traders to refer to assets that have declined in price in the short term.

The returns were great so far (i.e. I was able to buy Commonwealth Banks (ASX:CBA) at $62, which is now trading around $100).

If omicron evolves and the uncertainty levels grow, some interesting opportunities might appear and we need to be ready to make the most of it.

Bottom line

I am not rooting for lockdowns – in fact, I am extremely tired of them. However, these things are completely out of our control and the most intelligent thing is being ready in case they happen.

I have already prepared some cash to act if the markets crash and I highly advise you to do the same!

Speak (write) soon!