Delta Variant Impact on the Global Market

By: Jade Amiel, Funds Administrator Posted:

The risks associated with the Delta variant continue to present a challenging backdrop, adding another layer of uncertainty to the outlook on global markets. However, the context and conditions around this variant outbreak are significantly different than the original COVID-19 outbreak which suggests that financial markets could continue to fare better compared to the March 2020 freefall.

Context and conditions changed but Headwinds still remain

Despite renewed measures to stop the spread locally and internationally, the Delta variant is not an unknown as with initial COVID-19 cases. Scientists now have a better understanding of the effects and transmission of new strains relative to the original virus. The IMF’s World Economic Outlook (June 2021) suggests that developed economies will see higher economic growth due to the expectation that vaccination will be near-universal in larger economies such as Europe, Asia, and the US moving into 2022. But, although some pundits have expressed cautious optimism that the Delta variant may not derail the market’s uptrend or economic recovery, conditions could worsen if the delta variant remains for an extended period. Its highly contagious nature coupled with a low global vaccination rate could lengthen the disruption to the global economy.

The US Federal Reserve has already changed its tone citing that even with inflation concerns, there will be no upward adjustments in interest rates over the short term. This should set the tone for some amount of volatility which has shown to be the opportunity for higher returns.

What should investors do? 

Market dynamics have changed significantly and each threat to global growth brings its own unique features. Ongoing fears of additional strains, rising cases, vaccine availability concerns, renewed lockdowns, and supply disruptions are expected to cause bouts of volatility in the near to medium term. Investors should therefore be prepared to navigate new choppy waters. In the new investing world, with equity valuations well above historical averages to add to the exceptionally low rates, investors will need to adopt new trading strategies versus what they have been used to. As the risks to economic growth increase, investors may need to shift towards value companies, which are known to trade at lower P/E multiples over growth-like companies. At the same time, growth companies have been the major drivers behind stock market performance in recent years so investors will need to maintain exposure but develop more active trading strategies.

With bonds, investors may need also to be more active as inflation jitters will continue to see more volatility but present more opportunities.

Long and short, COVID-19 and new strains are likely to remain present over the short to medium term. In the absence of higher vaccination numbers which will bring us closer to herd immunity, the ever-present risk of a double-dip recession will remain. Despite this, investors must remain nimble and focused on seeking opportunities, clear and opaque, as the greatest risk an investor can take in the current market is to do nothing at all.

Against this background, investors should consider more active portfolio or investment management such as adapting to a short-duration strategy and more active trading of assets to seize opportunities during market volatility.