Martin Pelletier: We are seeing tremendous opportunities in sectors most impacted by Omicron concerns
Author of the article:
Martin Pelletier
Markets, which for the most part have been willing to look past the pandemic, are now showing signs of weakness on concerns over the latest variant. Photo by Getty Images/iStockphoto files You can feel the negativity and frustration levels rise as we enter our third year of living with COVID-19 since it seems like nothing that is being done can stop this virus.
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Even markets, which for the most part have been willing to look past the pandemic, are now showing signs of weakness on concerns over the latest variant.
Some may be asking why Omicron is different from past variants and, if it is, what are the risks that lie ahead?
This is when it’s important to get an understanding of the bigger picture. Governments have learned they can use the pandemic for their own agendas, such as the Build Back Better campaign, allowing them to borrow, print and spend massive amounts of money on things that have absolutely nothing to do with the virus itself.
The biggest risk to this increased spending is rising interest rates and the associated increase in debt-servicing costs, so it isn’t surprising to see policy-makers fighting the inflation narrative tooth and nail.
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But when it comes to energy costs, they are rising because of underinvestment in new supply and a surge in demand as economies attempt to get back to normal. In some regions, such as Europe, mismanaged energy policies like shutting down nuclear and going all in on unreliable renewables have caused power and natural gas prices to skyrocket. For example, natural gas prices there are currently 10 times that of what you and I are paying to heat our homes.
But instead of having their central bankers raise rates, watch how governments consider lockdowns as a tool to control economic activity.
The first step is playing up Omicron fears and the threat of lockdowns, which already appear to be working their magic on oil prices. But that strategy isn’t having much effect in Europe yet, so it wouldn’t be surprising to soon see full-blown shutdowns being implemented in the hardest-hit regions such as Germany.
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The United States is an entirely different story, since there is little to no appetite for further restrictions that could result in civil unrest. People, especially those who have complied in the past, have simply had enough and are learning to live with the virus.
That leaves President Joe Biden once again talking up a poor hand and it is just a matter of time before the market eventually calls his bluff. Even consumers are looking past Omicron, given that the number of commercial flights tracked by FlightRadar24 hit its highest levels this year last Friday.
As an investor and portfolio manager, we are seeing tremendous opportunities in those sectors most impacted by Omicron concerns.
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Article content For example, oil and gas companies have been hammered, with the S&P/TSX Capped Energy Index selling off 12 per cent and the SPDR S&P Oil & Gas Exploration & Production falling more than 20 per cent from their respective November highs.
U.S. banks as represented by the Vanguard Financials Index have also fallen by nearly 10 per cent from their November highs on concerns over higher interest rates and a slowing U.S. economy.
Overall, the broader market was looking for a reason to take some profits, especially in those sectors that have had some solid gains this year such as energy and financials.
But it is important to remember that, ultimately, the consumer wants to get on with living, even as our politicians appear to be using fear to implement control of areas they normally have no control over.
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Article content I read a great quote the other day by Christopher Voss, the chief executive of The Black Swan Group, who said our brains work up to 31 per cent more effectively in a positive frame of mind. With that in mind, shut off the noise over the holidays, share some time with your loved ones and have yourself a very Merry Christmas. You’ll feel better and so will your portfolio.
Financial Post
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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