Omicron: How to Position Your Portfolio

Dec 2, 2021

Over the past 1 week, the frequency of news flow regarding the new variant 'Omicron' has been grabbing eyeballs.

Twitter which is a great source of information and speculation at times, has again erupted with 'expert' comments from people who have no formal knowledge about the new strain.

To paraphrase Winston Churchill, 'Never in the history of mankind has so much been said by so many who know so little'.

Over the weekend, I was going through my twitter feed, which includes a list of global and domestic mutual fund managers, technical analysts, doctors, CEOs of vaccine makers, and heads of state, along with health ministries of major countries.

What amazed me is, twitter feeds and comments about the new virus were based on their positioning in the market.

For simplicity, I bifurcated the audience in to 2 sets - Optimists and Pessimists.

Both had their biases. Some people were more biased based on their positioning in the market while some were trying to be objective.

The Optimist:

The most commonly quoted example by these people was from a doctor by the name of Dr Coetzee in Gauteng province of South Africa who said a dozen of her patients with the new variant have seen mild symptoms.

The most common symptom among healthy men was 'feeling tired'. She was however worried about unvaccinated people with comorbidities.

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Other news flowing around was way more optimistic. It said the Omicron variant is a 'Blessing in Disguise' as the new variant could kill/the more lethal delta variant.

The consensus among the optimists was although the transmission may be faster but this variant is much milder as evidenced from the low hospitalisation and death rates.

My question to these learned people is: 'How can you make assumptions about a new variant in 5-7 days'?

Nonetheless, biases work this way.

The Pessimists

Broadly, they say the following...

Almost all antigens have changed. South Africa has a very high natural immunity, even that is not able to stop it.

Omicron has more than 30 mutations and may bypass vaccines.

The World Health Organization has labelled it as a variant of concern.

Also, a country like Israel which is known for its very high rate of vaccination and strong R&D has closed its borders for everyone.

I am sure Israel knows more than the cumulative wisdom of people on twitter put together.

Let's focus on what people believed in based on the biases they already had.

Fund managers, HNIs, technical analysts who had positioned themselves with a bearish perspective had negative news flows on their feeds.

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I went through past 1 month's tweets of these people, which clearly indicated they wanted the markets to crash. These were people who have been talking about a crash since a long time or may be holding cash anticipating a fall.

Their timelines were flooded with negative news and caution all around.

People who were fully invested were optimistic and called it a buying opportunity.

Their timelines were all about buying the dip.

Vaccine makers jumped in to clarify that new vaccines could be rolled out in the early part of the new year.

I didn't come across any vaccine maker who said let's wait and watch or the current vaccine could fight the virus. They sense a business opportunity.

Equity research houses were in wait and watch mode but again some recommended caution and concern while other said it would not materially affect growth.

This too, based on their relative positioning on equity as an asset class and on India from a geographic portfolio allocation.

The only set of people who have a prior experience and are qualified to make a diagnosis - the doctors - suggested 2 things.

1)The sample size is too low as it is restricted to South Africa.

2) It will take at least 8-10 days to figure out the diagnosis effectively.

So, everything you heard last week was pure speculation.

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Human minds are programmed to believe things which suit our biases. This was evident from the twitter feeds.

As analysts, we get paid to make assumptions. However, the people making the assumptions didn't have any expertise.

It's normal for the markets to panic as they seem to discount things in advance. However, this is pure speculation in my view.

The point I am trying to make is to avoid selling or buying during times of extreme speculation.

Markets always tend to have knee jerk reactions to speculative events. But eventually, they settle down as facts come to light.

Speculative moves are good when you are a trader. However, as a long-term investor, clarity and stability is more important.

Keeping in mind the example of last week's panic about the virus, I would like to highlight the important aspect of viewing equity markets holistically.

Market Positioning

Many a times, even after posting weak quarterly results, we see the stock price of a company rising instead of declining. This is because the bad results were already priced in the stock and the stock has bottomed out.

The opposite also happens where good results are followed by a decline. This is because the best was priced into the stock and it was trading at expensive valuations. Thus, it was difficult to justify future growth.

Up to October 2021, India was one of the best performing equity markets. We had a nonstop rally without a meaningful correction for 18 months. The market was overheated in all respects.

The important part was the market positioning. This was at an extreme level.

Assume the Nifty would have been at 12,000 levels and not at an all-time high of 18,600. The reaction to this new variant would have been very different.

When the risk-reward equation is not in favour of investors, the markets fall is justified by any reason.

It could have been the US Fed's tapering plan or some geopolitical issue or it could be anything else.

In this case, it was the new variant.

The point I am trying to make is markets needed to fall and it fell. The reason could have been anything.

In a nutshell, always focus on the market positioning before taking a decision. As long-term investors focus on objectively evaluating the market and not on news flow.

I am sure you must have seen from the examples above, the news flow was biased and prejudiced to suit investors and their positioning.

The Golden Rule of Markets

Never Buy/Sell stocks based on speculation leading to panic and euphoria. Let the trend settle down.

We don't know what impact the new variant will have on the economy. It's too early to speculate.

In the process, we may not catch the bottom or be able to sell at the top. However, it's much better to ride a trend rather than a falling knife.

While the key to making long-term wealth is to do a bottom up analysis, market positioning and risk management are also important to give you margin of safety.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure

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