November 2021 Review: Omicron variant weighs on market confidence

  • Equity markets fell in response to the emergence of the Omicron COVID variant.

  • Bond yields pulled back from recent highs.

  • The $A dropped sharply, as commodity prices softened and renewed COVID related growth concerns took hold.

International Equities

After consolidating the gains from October, global equity markets dropped into negative territory in the final week of last month. Growing evidence of the high rate of transmissibility of the Omicron COVID variant was the major catalyst for the turnaround on markets. The US market fared better than most, with the US S&P 500 Index decline restricted to just 0.7%. Losses were significant in Europe, where non Omicron related case numbers were on the rise, prompting some reintroduction of restrictions on activity. However, losses on the Hong Kong market were even larger,with the Hang Seng Index falling 7.4%, to now be at its lowest level for 12 months. Ongoing concerns over the earnings outlook and regulatory constraintson Chinese technology,financial and property companies continued to weigh on market sentiment. It was also a difficult month for emerging markets, where the Omicron variant potentially provides a greater threat due to the lower vaccination rates. Overall, emerging markets declined 3.2% over November.

Australian Equities

Losses on the Australian share market were slightly less than the global average, with the S&P ASX 200 Index falling 0.5%. A large 6.9% fall in the finance sector was a major contributor to the decline, with CBA (down 11.0%) and Westpac (down 17.9%) the most notable movements. The market was unimpressed with the Commonwealth Bank’s September quarter trading update, where it detailed that income was down 1% over the 3-month period. Similarly, Westpac’s full year results (for the period ending September) were announced at the start of November, with the bank’s share price falling steadily thereafter.

Also contributing to the overall market decline was the energy sector, which dropped 8.3% over the month. This reflected a 6.6% drop in global oil prices from recent highs, as a number of countries (including the US and China) announced that strategic oil reserves would be released onto the market in response to shortages and higher prices for the commodity.Although iron ore prices also continued to weaken, the Australian resource sector bounced back from some recent losses, partially due to the fact that some of the impact of weaker commodity prices was neutralised by the sharp drop in the value of the $A.

Some of the more defensive sectors on the Australian market performed relatively well last month, possibly in response to a pull-back in bond yields. Property Trusts, healthcare, utilities and consumer staples all posted positive returns.

Fixed Interest & Currencies

November was another month of high activity on bond markets, with some of the increase in yields recorded in October being reversed in November. The Australian 10-year bond yield dropped from 2.09% to 1.69% over the month; but remains well above the 1.12% recorded at the end of August. Yields also dropped at the short end of the yield curve. The 2-year Australian government bond declined by 0.16%; but at 0.53% the yield still implies a material tightening of monetary policy by the Reserve Bank within the next 2 years. In the US, 10 year bond yields fell slightly from 1.55% to 1.43%. This fall came despite the Federal Reserve Chairman, Jerome Powell, suggesting that the tapering of bond purchases may have to be brought forward due to inflation being higher than expected.

Following a strong rise in October, the $A dropped sharply in November, moving down from US 75.5 cents to US 71.4 cents. The fall is likely to be in response to weaker commodity prices, a narrowing in the interest rate differential between Australia and the U.S. and the broader concerns over the Omicron variant and its potential impact on economic growth. The weaker Australian dollar did have the effect of softening the impact of falling global equity values, with equity investors who held unhedged currency exposures experiencing an increase in valuations, despite the weaker underlying equity markets.

Important Information

The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 YrIndex, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged).

General Advice Disclaimer

This document has been prepared by Sage Advisers (AFSL 238039). Any advice provided is of a general nature and does not take into account personal circumstances. Any decision to invest in products mentioned in this document should only be made after reviewing the relevant Product Disclosure Statements. Should the reader wish to avail of using the above investment philosophy they should only do so firstly seeking personal financial advice through a financial planner. Past performance is not a reliable indicator of future performance.

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