Market volatility to continue under the shadow of Omicron variant

Risk assets were hit hard on Friday when news of the Covid-19 Omicron variant made the headlines during the Thanksgiving Day holiday in the US.

Equity markets were rocked, with the S&P500 falling more than 2.2 per cent on November 26 – its largest one-day drop in more than nine months – while crude plummeted about 12 per cent per barrel as investors weighed up the potential of another global lockdown and its effect on oil demand.

That the new variant hit headlines amid a low liquidity, holiday trading environment exacerbated the sell-off as risk aversion combined with liquidity risk.

The reaction to Omicron has been “act first, ask later”, with travel curbs from the African subcontinent quick to be introduced and some countries shutting borders altogether.

Along with Israel and Morocco, Japan was the first Group of Eight nation to announce a border closure to non-resident foreigners early Monday morning.

With the World Health Organisation deeming it “a variant of concern that carries higher risks than other viruses”, expect the uncertainty in markets to continue indefinitely as Omicron will dominate and drive risk moods in the short term.

What will be particularly interesting is if and how this new variant will affect future central bank policies.

Governments are clearly more sensitive to new variants and are ready to act far more swiftly, as seen by Japan’s actions on Monday.

One school of thought would suggest this could potentially delay further tapers to current monetary policy and tone down hawkish rhetoric to future interest rates.

Judging by the reaction of the US dollar to the new variant, this could be the case. The US dollar, traditionally seen as a safe haven that excels in a risk-off environment, sold off through Friday’s trading session.

This would suggest to me that markets were perhaps pricing in the potential for the Federal Reserve Bank to tone down its hawkishness towards future tapers and interest rate rises. This is also why US Treasury yields dumped off on Friday – with lower expectations of future rate hikes, bond yields fall and vice versa.

The underlying themes that we focused on before Omicron emerged remain the same, albeit overshadowed by the new variant.

Central banks will continue to remain sensitive to inflation risks. Minutes from the last Fed meeting reiterate that it is willing to tighten policy faster if inflation continues to run hot.

You may recall that the Personal Consumption Expenditure (PCE), the measure of inflation that the Fed follows most closely, increased to 5 per cent. This Friday’s non-farm payrolls will also be a key release – payrolls are expected to show a gain of 550,000 new jobs in November, with the overall unemployment rate improving to 4.5 per cent from a previous reading of 4.6 per cent.

Across the pond, EUR/USD on the Dubai Gold & Commodities Exchange dropped below 1.12 for the first time since July 2020.

The US dollar, traditionally seen as a safe haven that excels in a risk-off environment, sold off through last Friday’s trading session

Gaurav Kashyap,
head of futures at EGM Futures

Weakness is expected to continue for EUR/USD in the weeks ahead. Fundamentally, European Central Bank president Christine Lagarde has warned that monetary policy tightening could choke an EU recovery and minutes from the most recent ECB meeting suggested that the central bank would maintain “sufficient optionality in the calibration of its monetary policy measures”.

Coupling these dovish undertones with the emergence of the Omicron variant means that the outcome of the December ECB meeting will be even more uncertain.

And finally this week, Opec will discuss oil production with its non-Opec partners. While the group is largely expected to keep its current 400,000 barrels per day increase in place, its views towards future demand could see some additional volatility coming into US crude gauge West Texas Intermediate and global benchmark Brent contracts on the DGCX.

Gaurav Kashyap is head of futures at EGM Futures. The views and opinions expressed in this article are those of the author and do not reflect the views of EGM Futures

The struggle is on for active managers

David Einhorn closed out 2018 with his biggest annual loss ever for the 22-year-old Greenlight Capital.

The firm’s main hedge fund fell 9 per cent in December, extending this year’s decline to 34 percent, according to an investor update viewed by Bloomberg.

Greenlight posted some of the industry’s best returns in its early years, but has stumbled since losing more than 20 per cent in 2015.

Other value-investing managers have also struggled, as a decade of historically low interest rates and the rise of passive investing and quant trading pushed growth stocks past their inexpensive brethren. Three Bays Capital and SPO Partners & Co., which sought to make wagers on undervalued stocks, closed in 2018. Mr Einhorn has repeatedly expressed his frustration with the poor performance this year, while remaining steadfast in his commitment to value investing.

Greenlight, which posted gains only in May and October, underperformed both the broader market and its peers in 2018. The S&P 500 Index dropped 4.4 per cent, including dividends, while the HFRX Global Hedge Fund Index, an early indicator of industry performance, fell 7 per cent through December. 28.

At the start of the year, Greenlight managed $6.3 billion in assets, according to a regulatory filing. By May, the firm was down to $5.5bn.

While you're here

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The specs: Macan Turbo

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On sale: Deliveries start in October

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

Sri Lanka-India Test series schedule

1st Test India won by 304 runs at Galle
2nd Test Thursday-Monday at Colombo
3rd Test August 12-16 at Pallekele

If you go

The flights
Emirates and Etihad fly direct to Nairobi, with fares starting from Dh1,695. The resort can be reached from Nairobi via a 35-minute flight from Wilson Airport or Jomo Kenyatta International Airport, or by road, which takes at least three hours.

The rooms
Rooms at Fairmont Mount Kenya range from Dh1,870 per night for a deluxe room to Dh11,000 per night for the William Holden Cottage.

THE SPECS – Honda CR-V Touring AWD

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0-100kmh in 9.4 seconds

Top speed: 202kmh

Fuel consumption: 6.8L/100km

Price: From Dh122,900

The specs

Engine: 3.9-litre twin-turbo V8
Power: 620hp from 5,750-7,500rpm
Torque: 760Nm from 3,000-5,750rpm
Transmission: Eight-speed dual-clutch auto
On sale: Now
Price: From Dh1.05 million ($286,000)

COMPANY PROFILE

Name: Kumulus Water

Started: 2021

Founders: Iheb Triki and Mohamed Ali Abid

Based: Tunisia

Sector: Water technology

Number of staff: 22

Investment raised: $4 million

Labour dispute

The insured employee may still file an ILOE claim even if a labour dispute is ongoing post termination, but the insurer may suspend or reject payment, until the courts resolve the dispute, especially if the reason for termination is contested. The outcome of the labour court proceedings can directly affect eligibility.

- Abdullah Ishnaneh, Partner, BSA Law