The emergence of the delta variant of Covid19 is causing real concern not just here in Australia but across the world. While many countries were returning to normal life, the accelerating spread of the delta variant has slowed this.
What does this mean right now?
It means the global economic recovery will be slower. But it also means that the risk of inflation is reduced in the short term and that Central Banks around the world may leave interest rates on hold for a little longer.
From a stock market perspective, it's likely capital switches from the ‘recovery’ stocks and traditional companies poised to benefit from an imminent recovery, back to the big tech stocks.
Locally, it may mean that the eagerly anticipated capital management programs we were expecting from the big banks will be on hold or scaled down for now.
As we enter reporting season, many of the companies reporting great results will not see the expected share price impact. Those numbers simply reflect a materially different environment to what the market now anticipates.
This virus also continues to mutate and spread. So, I do not think that the delta variant is the last of it. I expect that the future will include new variants and booster vaccines. In other words, these concerns will reappear from time to time in the months and presumably years ahead.
Overall, my view is that the economic recovery will remain well on track, if a little delayed. However, the Federal Government will need to reinstate many of the programs and initiatives they previously put in place last year for business and workers.
Federal and state governments will most certainly now need to prioritise the vaccination program. It may be the only way out of lockdowns from here.
In Sydney, we went back into lockdown on June 26 and after almost a month, it does not look like we are heading out of it any time soon. Looking at the numbers I think this outbreak is similar to the one that put Melbourne into lockdown for 112 days.
In my opinion, best case scenario is that this ends up being a 3-4 month lockdown and worst case we are in lockdown until NSW is at 70% of the population vaccinated (maybe November).
The current concerns around the delta variant bring with it the potential for similar investment opportunities to those we saw in back March and April last year when Covid19 first hit.
Specifically, in relation to Covid19 impacted stocks, I am much more interested in buying great companies with earnings that have been hit hard in the short term, but very likely to return to normal post covid, over companies that get a one-off boost from sales brought forward.
In short, I don’t think it hurts for share markets to pull back from recent all-time highs. I also think that governments and businesses have at their disposal all the necessary tools to navigate the situation and for the global economic recovery to continue, though at a slower pace. I remain keen to buy stocks where the market overreacts in the short term and opportunities present themselves.
This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.