As Omicron rattles stock markets, is the panic warranted?

While medical experts say they don’t know enough yet about the new variant of concern, politicians, vaccine company bosses and economists haven’t shied away from airing their views
Markets and news stories tend to overreact to shock news, but investors should look carefully at the evidence

Richard Harris

Published: 4:30pm, 2 Dec 2021

Why you can trust SCMP

“The brains of humans contain a mechanism designed to give priority to bad news,” says behavioural psychologist Daniel Kahneman. “‘You’ve got to prepare for the worst’: World responds to new variant’s arrival”, read a headline in The Washington Post. The New York Times pointed to “a ‘Frankenstein mix’ of mutations raises concerns”, while noting that “the variant may remain vulnerable to current vaccines”. A Post report had a strapline, citing an infectious disease expert, which said, “further flight bans may be necessary” and “the government should discourage travel”.

The global stock markets took the scaremongering to heart with falls on world markets on Friday. Europe lost 3.7 per cent, and Wall Street lost 2.3 per cent – tiny blips compared to the rises of 14 and 24 per cent respectively this year. Both markets somewhat recovered on Monday, indicating the scare was overblown, although the virus story lingered.

Therein lies an important lesson about narratives in finance. Don’t react on the first flush of breaking news about an old narrative. Markets and news stories tend to overreact to shock news; investors need to keep their nerve and look carefully at the evidence.

It will probably take a week or two for the boffins to figure out quite how bad this variant is. But the headlines weren’t going to wait. The initial summary of most medical experts was that we just don’t know enough yet. That didn’t stop politicians, chosen advisers, bosses of vaccine companies and economists from having a view – and it is in the interests of most of them for it to be bad.

A Sky News ticker read,“Adviser to South African government says too early to tell whether vaccines will work against the Omicron variant”. The line would make more sense with the word “not” between “will” and “work”. Why make the worst assumption on little evidence?

02:28

What do we know about the new coronavirus variant Omicron?

The fevered sentiment around anything Covid-19 makes it easy to spin the narrative into hot news. Surely the most sensible approach is for our experts to assume the status quo until we have hard evidence to the contrary. If the variant was really that bad, we would surely have at least some early indications, given how studied this virus is.

And therein lies the rub, for Covid-19 benefits from massive attention bias, with our experts falling prey to the “law of small numbers”. Developed by Kahneman and his coauthor, Amos Tversky, this “law” says people tend to generalise based on small amounts of data.

The most fundamental statistic about the virus is consistently ignored. The age-standarised mortality rate for deaths involving Covid-19 in the UK between January and September was 849.7 per 100,000 person-years for the unvaccinated and 26.2 per 100,000 person-years for the fully vaccinated. UK excess deaths, those occurring above expectations, have been relatively low since March 2021.

The virus is broadly under control, but we still want to wallow in the bad news.

British Prime Minister Boris Johnson watches as an elderly woman receives a Pfizer-BioNTech booster vaccination as he visits a Covid-19 vaccination centre in London on October 22. Photo: AFP

The science says that we have extremely effective vaccines and therapies for the virus that causes Covid-19. The variants named Epsilon to Mu passed us by without a murmur. Omicron itself is merely a variant, not a whole new virus that we know nothing about.

Scientists fear that this new strain could be more transmissible and indeed in Gauteng, South Africa, early testing indicating that 90 per cent of the new cases are of Omicron. But is that not logical if you think about it?

The experts worry about “vaccine escape” but so far the existing vaccines seem to mitigate serious illness even if they don’t hit the bullseye. The AstraZeneca vaccine showed 80 per cent levels of hospitalisation protection against the Beta variant, despite not being designed to do so. Indeed, a tailor-made vaccine for Omicron could be ready in three months.

This is not to say that the Omicron restrictions that many countries have brought in to try and reduce the variant transmission are not sensible. Indeed, the West should have acted promptly in February 2020. Further measured restrictions today will not hurt economic growth used to two years of friction, but calls for tighter restrictions than ever are just panicky.

02:30

Asia tightens borders as spread of new coronavirus variant Omicron clouds region’s return to travel

The lesson for those investors who sold on the dip last Friday should be to ask: the market may have fallen but is there any evidence to say that Omicron is going to shut the global economy down? The real reason why markets fell last week was that most have gone up effortlessly this year and quite rightly so. Liquidity is still high, earnings are going up, and the Fed is ridiculously accommodating negative real interest rates.

This new variant came at a time when the markets needed a good excuse to break the consistent bullishness, but it will not be the trigger for a crash. It was merely the supporting act for Fed chairman Jerome Powell’s comments this week indicating interest rates might go up earlier than expected.

As another great behaviouralist Gerd Gigerenzer says, we have to live with uncertainty. Investors must follow the science, and not be panicked by editors, politicians and epidemiologists burnishing their careers. Since the beginning of time, viruses have and will continue to evolve. Investors should worry about the next one – not a variant.

The remaining question for Covid-19 is: what happens when the World Health Organization runs out of Greek letters?

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster and financial expert witness