ONCE again the discovery of a new Covid-19 variant is wreaking havoc on the financial markets, albeit of a smaller magnitude.
Last March, the pandemic swept through financial markets, resulting in a massive selldown.
Omicron, which is said to be spreading faster than other Covid-19 variants, has sent stock, commodities and even the cryptocurrency markets into a topsy-turvy.
Malaysian stocks have experienced a volatile trading session this week.
The FBM KLCI, which comprises the 30 largest companies on Bursa Malaysia by market capitalisation, finished lower at just above the 1,500 point mark on Thursday.
The index fell almost 0.7% this week in line with the weakness in the regional and global financial markets.
The new variant has injected fresh uncertainty into the market as it spells slower economic growth for 2022. This is on top of the existing fears of rising inflation.
However, Rakuten Trade Sdn Bhd head of equity sales Vincent Lau says that there could be some overreaction by investors.
“We expect volatility to persist in the short run. Investors could be overreacting to the Omicron news, especially when the world is aware of Covid-19 and has been dealing with it for almost two years,” he says.
Lau reckons that the selloff in markets is a knee-jerk reaction.
For Malaysia, he says the high vaccination rate and the rollout of the booster shots should offer protection to the population.
However, a major concern is the efficacy of the current vaccines against the new variant.
The Omicron variant, which was first identified in South Africa, is reportedly more transmissible but less dangerous.
“Our body is like the computer, where we need to keep updating new ‘antivirus’ software or vaccines in the case of humans,” Lau says.
“While we don’t know the severity of the symptoms from the new variant, it is unlikely to derail the global economic recovery path next year,” he opines
Juwai IQI chief economist Shan Saeed says it is getting more difficult to curb the pace of inflation.
The selloff in the local stock market was broadbased, although the utilities sector was more defensive compared with other sectors.
The Malaysian stock market is the worst performing in South-East Asia, falling more than 7.7% year-to-date.
Lau reckons that other factors are at play, such as the weak sentiment after Dyson terminated its relationship with manufacturer ATA IMS Bhd on allegations of forced labour.
There is also the upcoming higher stamp duty for stock trading and the proposed higher corporate tax known as Cukai Makmur.
Bursa Malaysia Bhd says the proposed increase in stamp duties for stock trading will make the stock exchange the most expensive market to trade in Asean.
The operator for the stock exchange says the cost of transactions on Bursa Malaysia is already among the highest in Asean, prior to the Budget 2022 prosperity tax proposal.
Bursa Malaysia points out that it is cheaper to trade in markets such as Singapore, the Philippines, Indonesia and Thailand.
Nonetheless, Lau says the recent sell down could be an opportunity to buy as Malaysia stocks appear more attractive.
Aside from the risk of another lockdown, investors are concerned about rapid inflationary pressures and the possibility that the Omicron variant would slow down global economic recovery.
Juwai IQI chief economist Shan Saeed says it is getting more difficult to curb the pace of inflation.
“In the United States, inflation remains serious and recalcitrant. Inflation numbers have moved up stubbornly from 2.4% in February to 6.2% in October: the fastest pace since 1990 and the fifth straight month of inflation remaining at above 5%.
“This inflation is based on a demand side push, not the supply side. The US Federal Reserve (Fed) is in a difficult environment as the virus threatens to pull the central bank into different directions by putting its goals of low and stable inflation and a tight labour market into greater conflict,” he tells StarBizWeek.
The global economy is heading towards another round of uncertain times.
“We have seen a slowdown in the global economy, shortages, supply chain bottlenecks, geopolitical risks, pandemic-related challenges in Europe coupled with inflated equity market valuations,” Shan says.
The outlook of economic growth remains challenging as all of this, coupled with the new variant, could lead to a stagflation as seen in the 1970s.
Stagflation is a combination of rising inflation and declining growth.
“Stagflation could affect many economies with a slowing global economic recovery. Should history repeats itself, the global economy will not recover before 2025,” Shan says.
Eyes are now on the Fed, which has been saying for months that the spike in prices is temporary.
Its chair Jerome Powell suggested this week the bank would likely speed up the taper of its monthly bond-buying programme and then focus on lifting interest rate, despite the new variant risk.
This has sent jitters to the US and global stock markets.
The World Health Organisation (WHO) has categorised Omicron as a “variant of concern” because of the higher risk of infection.
At least 17 countries have detected the virus. Many countries have rushed to reimpose travel restrictions.
Interestingly, JPMorgan Chase & Co said the Omicron may signal that the Covid-19 pandemic is ending and that markets have been overreacting to it.
While it is likely that Omicron is more transmissible, early reports suggest it may also be less deadly, which would fit into the pattern of virus evolution observed historically, strategists Marko Kolanovic and Bram Kaplan of JP Morgan wrote in a note Wednesday. This might ultimately be a positive for risk markets because it could signal that the end of the pandemic is in sight, they say.
The bank views that investors should be focusing on reopening themes.
While there is evidence that Omicron may be less lethal, perhaps the world has to learn to deal with uncertainties from the emergence of new variants.
Countries now need to decide on how to boost their economy and how they are managing the inflationary pressures going forward.