Our latest investment commentary from Avellemy Chairman, Graham Bentley

Graham Bentley

In May this year the World Health Organisation (WHO) proposed a naming convention for Coronavirus strains - an 'easy to say' and non-stigmatising convention that sought to avoid causing offence to any cultural, social, national, regional, professional, or ethnic groups. WHO consequently elected to use the Greek alphabet to denote each important COVID mutation.

Most of us probably became aware of this process when "Delta" became the dominant variant and may have missed the rather less-successful mutations like Epsilon and Lambda. For any new strain, the next letter 'nu' would be skipped because the WHO did not want to create the impression this was a 'new' virus. The following letter in the alphabet is 'Xi', but since this sound is a very common Chinese surname with a variety of spellings and meanings in Mandarin, and indeed Xi Jinping is the most powerful Chinese leader since Chairman Mao, it was probably felt best to shift one letter along. In the last few days of November, we became familiar with the letter that equates to the vowel 'o', as in "ominous" - Omicron.

Market performance dampened by rises in COVID

Even before the new variant was detected, countries in Northern Europe had seen significant rises in COVID-related hospital admissions, leading to reintroduction of restrictions including full lockdown in Austria; these reimpositions sparked widespread protests and dampened market performance that had earlier been more positive.

No significant announcements from COP26

Given these late-month developments, it might be easy to overlook that representatives of 200 countries gathered in Glasgow for the 26th UN Climate Change Conference (COP26). Unfortunately, aside from some peripheral agreements including leading motor manufacturers' phasing out new petrol and diesel models by 2030, and sales by 2040, there were no announcements whose outcomes might be expected to significantly reduce the likelihood of increasing disruption from climate change.

Jerome Powell renominated to Chair of US Federal Reserve

COVID and COP aside, inflation remains the markets' bête noire. The US Federal Reserve Chair Jerome Powell was renominated for another four years, i.e. until February 2028 at which point, he will have been a member of the Board of Governors for fourteen years, and Chair for eight. His first statement declared he was 'retiring' the term 'transitory' when applied to inflation - a tacit admission that the Bank expects producer (and by extension consumer) price inflation to be rather more persistent than had been suggested earlier in the pandemic. 

US inflation highest level since 1990

The US inflation rate is now 6.2%, its highest level since 1990, and is expected to rise again for November to perhaps 7%. Yet unemployment claims are the lowest for over 50 years and retail sales growth is healthy. Consequently, markets seemed confident about US growth despite other concerns. Meanwhile, inflation is less of an issue in Europe; consumer confidence is lower as are retail sales, while a German VAT increase drops out of the calculation shortly. This has shortened expectations for continued economic growth by perhaps 12 months.

Confidence rising in UK despite shock rises in energy prices

In the UK on the other hand, confidence seems to be rising. Despite the ending of the government's furlough scheme, employment data is improving and some supply chain issues are resolving, giving a more positive outlook for retailers as we approach Christmas. The Bank of England's decision to keep interest rates at their historic lows was also supportive. However, the shock rises in energy prices saw 25 suppliers collapse, including high-profile provider Bulb. Gas prices rose again 17% when Germany's energy regulator suspended approval of Nord Stream 2 pipeline from Russia to Germany, as it did not comply with German law.

Governments adopt very different strategies to vaccine take up

For most of the month, the market was betting that 'nothing can go wrong'. The US Federal Reserve System would keep inflation under control and growth would continue. November saw the anniversary of the introduction of the first COVID vaccines, and stock markets' subsequent strong growth over the following 12 months reflects initial expectations that vaccines would be widely available, and take-up would be universal. More lately however disappointment has set in, with a significant number of nations being slow to distribute vaccines, and a wide variance of acceptance. Governments have adopted very different strategies to persuade their populations to vaccinate. While Europe is now seeing record numbers of cases, Austria has effectively banned the unvaccinated from any establishments. Greece requires negative PCR tests to be evidenced by those unvaccinated, while the UK has sacked 57,000 care-home workers who remain unvaccinated, under the so-called "no jab no job" rule. Strategies to impose vaccination in the US are even more strongly rejected.

The appearance of Omicron has been the proverbial 'spanner in the works', an unexpected (and yet highly likely) development in the ongoing pandemic. As I write, the evidence suggests that despite its increased transmission rate, the severity of symptoms is low, particularly among the vaccinated population. Markets have reacted as might be expected - hoping for the best but planning for the worst - and it is likely that there will be some violent swings in daily market performance for the time being until the data on Omicron is better understood.

And finally

However that may turn out, may I wish all our clients an enjoyable and satisfying Christmas break. I hope to be skiing with family, travel restrictions allowing. For those who still believe in Father Christmas, whatever travel restrictions may be applied to the rest of us, I am reliably informed Santa's reindeer have herd immunity...